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Sovereign Defaults before International Courts and Tribunals International law on sovereign defaults is underdeveloped because States have largely refrained from adjudicating disputes arising out of public debt. The next wave of sovereign defaults is likely to shift dispute resolution away from national courts to international tribunals and transform the current regime for restructuring sovereign debt. Michael Waibel assesses how international tribunals balance creditor claims and sovereign capacity to pay across time. The history of adjudicating sovereign defaults internationally over the last 150 years offers a rich repository of experience for future cases: US state defaults, quasi-receiverships in the Dominican Republic and Ottoman Empire, the Venezuela Preferential Case, the Soviet repudiation in 1917, the League of Nations, the World War Foreign Debt Commission, Germany’s thirty-year restructuring after 1918 and ICSID arbitration on Argentina’s default in 2001. The remarkable continuity in international practice and jurisprudence suggests avenues for building durable institutions capable of resolving future sovereign defaults. Michael Waibel is a British Academy Postdoctoral Fellow at the Lauterpacht Centre for International Law and Downing College, University of Cambridge.

CAMBRIDGE STUDIES IN INTERNATIONAL AND COMPARATIVE LAW

Established in 1946, this series produces high quality scholarship in the fields of public and private international law and comparative law. Although these are distinct legal sub-disciplines, developments since 1946 confirm their interrelation. Comparative law is increasingly used as a tool in the making of law at national, regional and international levels. Private international law is now often affected by international conventions, and the issues faced by classical conflicts rules are frequently dealt with by substantive harmonisation of law under international auspices. Mixed international arbitrations, especially those involving state economic activity, raise mixed questions of public and private international law, while in many fields (such as the protection of human rights and democratic standards, investment guarantees and international criminal law) international and national systems interact. National constitutional arrangements relating to ‘foreign affairs’, and to the implementation of international norms, are a focus of attention. The Board welcomes works of a theoretical or interdisciplinary character, and those focusing on the new approaches to international or comparative law or conflicts of law. Studies of particular institutions or problems are equally welcome, as are translations of the best work published in other languages. General Editors

James Crawford SC FBA Whewell Professor of International Law, Faculty of Law, and Director, Lauterpacht Research Centre for International Law, University of Cambridge John S. Bell FBA Professor of Law, Faculty of Law, University of Cambridge

Editorial Board

Professor Hilary Charlesworth Australian National University Professor Lori Damrosch Columbia University Law School Professor John Dugard Universiteit Leiden Professor Mary-Ann Glendon Harvard Law School Professor Christopher Greenwood London School of Economics Professor David Johnston University of Edinburgh Professor Hein Ko ¨tz Max-Planck-Institut, Hamburg Professor Donald McRae University of Ottawa Professor Onuma Yasuaki University of Tokyo Professor Reinhard Zimmermann Universita¨t Regensburg

Advisory Committee

Professor D. W. Bowett QC Judge Rosalyn Higgins QC Professor J. A. Jolowicz QC Professor Sir Elihu Lauterpacht CBE QC Judge Stephen Schwebel

A list of books in the series can be found at the end of this volume.

Sovereign Defaults before International Courts and Tribunals Michael Waibel Lauterpacht Centre for International Law, University of Cambridge

CAMBRIDGE UNIVERSITY PRESS

Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, Saõ Paulo, Delhi, Tokyo, Mexico City Cambridge University Press The Edinburgh Building, Cambridge CB2 8RU, UK Published in the United States of America by Cambridge University Press, New York www.cambridge.org Information on this title: www.cambridge.org/9780521196994 © Michael Waibel 2011 This publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published 2011 Printed in the United Kingdom at the University Press, Cambridge A catalogue record for this publication is available from the British Library Library of Congress Cataloguing in Publication data Waibel, Michael Sovereign defaults before International courts and tribunals / Michael Waibel. p. cm. – (Cambridge studies in international and comparative law ; 81) ISBN 978-0-521-19699-4 (Hardback) 1. Debts, Public–Law and legislation. 2. Debts, External–Law and legislation. 3. Arbitration, International. 4. International courts. I. Title. II. Series. K4448.W35 2011 3430 .037–dc22 2010045606 ISBN 978-0-521-19699-4 Hardback Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party internet websites referred to in this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate.

Meinen Eltern, Eva Maria und Gottfried, von ganzem Herzen

It would be strange if now, in face of the formidable development of international debts, there were nothing for the lawyer to say. JOHN FISCHER WILLIAMS, Chapters on Current International Law and the League of Nations (1929)

To the Pennsylvanians (1845) Days undefiled by luxury or sloth, Firm self-denial, manners grave and staid, Rights equal, laws with cheerfulness obeyed, Words that require no sanction from an oath, And simple honesty a common growth – This high repute, with bounteous Nature’s aid, Won confidence, now ruthlessly betrayed At will, your power the measure of your troth! – All who revere the memory of Penn Grieve for the land on whose wild woods his name Was fondly grafted with a virtuous aim, Renounced, abandoned by degenerate Men For state-dishonour black as ever came To upper air from Mammon’s loathsome den. WILLIAM WORDSWORTH

ix

Contents

Preface Note: measuring sovereign liability over time Table of cases Table of treaties List of abbreviations Part I 1.

page xv xviii xx xlviii liii

Sovereign defaults across time

Sovereign debt crises and defaults A. US state defaults and arbitration B. Sovereign defaults as a perennial feature of sovereign lending C. Sovereign debt D. Sovereign debt restructurings E. Outlook

3 5 8 11 14 19

2.

Political responses to sovereign defaults A. Discretionary support by creditor governments B. Diplomatic protection C. Loan sanctions D. The use of force E. Diplomatic settlements

22 22 26 27 29 38

3.

Quasi-receivership of highly indebted countries A. Serbia’s Autonomous Administration of Monopolies B. The Greek International Financial Commission of Control C. Egypt’s Caisse de la Dette

42 44 44 46

xi

xii

contents

D. Fiscal Administration in Haiti E. The Dominican Republic’s receivership

47 47

4.

Monetary reform and sovereign debt A. The Serbian Loans and Brazilian Loans Cases B. The Norwegian Loans Case C. The Canevaro Brothers Case D. The Young Loan Arbitration E. Conciliation F. Evaluation

58 60 68 73 75 80 84

5.

Financial necessity A. The Russian Indemnity Case B. Socie´te´ Commerciale de Belgique C. ICSID cases arising out of Argentina’s default

88 89 94 98

6.

National settlement institutions A. Creditor organisations B. World War Foreign Debt Commission C. Foreign claims commissions D. National courts

103 103 105 120 121

7.

State succession and the capacity to pay A. Arbitrations on succession into sovereign debt B. Odious debt C. Payment capacity in arbitration

129 129 136 143

8.

Arbitration clauses in sovereign debt instruments A. Arbitration clauses before the twentieth century B. Arbitration clauses 1900–1945 C. Arbitration clauses after 1945 D. Reasons for the lack of arbitration clauses after 1945

157 157 160 162 167

9.

Creditor protection in international law A. Creditor claims before mixed claims commissions

169 171

contents

B. C. D. E.

Creditor claims before the ECHR Creditor claims before the Iran–US Claims Tribunal Creditor claims before foreign claims commissions Creditor claims in arbitration

xiii

182 187 189 201

Part II The future role of arbitration on sovereign debt 10.

ICSID arbitration on sovereign debt A. ICSID arbitration generally B. The advantages of ICSID arbitration C. ICSID jurisdiction over sovereign debt D. The objective core of ICSID jurisdiction E. Sovereign debt instruments under BITs F. Summary and conclusion

209 209 211 212 227 244 250

11.

Overlapping jurisdiction over sovereign debt A. Contractual versus treaty causes of action B. Choice of forum in sovereign bonds C. Waiver of the right to arbitration

252 253 260 262

12.

Sovereign default as trigger of responsibility A. Most-favoured nation and national treatment B. Expropriation C. Coercion in sovereign debt restructurings D. Summary

273 273 278 289 296

13.

Compensation on sovereign debt A. International law’s philosophy of creditor protection B. Partial compensation C. Speculation and partial compensation D. Assignment of sovereign debt E. Compensation on secondary market purchases of debt

298 298 301 303 308 312

14.

Building durable institutions for the international adjudication of sovereign debt A. The effectiveness of ICSID arbitration B. Creditor incentives to participate in restructurings

316 318 320

xiv

contents

C. Arbitrating sovereign capacity to pay D. Balancing creditor protection and a fresh start for debtor countries Bibliography Index

323 326 330 350

Preface

This book is a revised and expanded doctoral thesis which I submitted to the Law Faculty of the University of Vienna in April 2008. First and foremost, I thank my supervisor August Reinisch. Not only did he stimulate my enthusiasm for international law early in my undergraduate career, he also encouraged me to work on sovereign debt, when I was still groping in the dark, answered an incessant flow of questions and challenged my assumptions. He was the best doctoral supervisor anyone could hope for. I further owe special thanks to Detlev Vagts, the Bemis Professor of International Law Emeritus at Harvard Law School, who undertook the arduous task of second examiner with great speed and efficiency. Incidentally, he also introduced me to international law at Harvard and took an active interest in my career as an international lawyer. In summer 2005, I was privileged to work alongside an extraordinary group of international civil servants in the Legal Department of the International Monetary Fund. In particular, I am deeply indebted to Thomas Laryea who provided constant and invaluable advice, and strongly encouraged me to explore many facets of ICSID arbitration on sovereign debt. Thanks are due to my two anonymous reviewers of Cambridge University Press. Their many useful comments helped me improve the final product. Damien Eastman, Cynthia Lichtenstein, Darshini Manraj and Christoph Schreuer gave extensive feedback on earlier drafts. John Barker, Charles Blitzer, James Crawford, Ignacio Rodriguez, Guglielmo Verdirame and Jeromin Zettelmeyer pointed me in new directions. The librarians at Cambridge, the World Bank, the IMF, the Law Library of Congress and the British Library of Economic and Political Science (LSE) helped me uncover much of the material used in this book. xv

xvi

preface

A summarised version of Chapters 10 to 13 appeared as ‘Opening Pandora’s Box: Sovereign Bonds in International Arbitration’ in the American Journal of International Law (2007). The list of people who helped with my research in one way or another is long: Georges Abi-Saab, Freya Baetens, Jaleh Barett, Ronald Bettauer, Nigel Blackaby, Wouter Bossu, Juan Pablo Bohoslavsky, Lee Buchheit, Markus Burgstaller, George Bustin, Marcos Chamon, Zachary Douglas, William English, Gonzalo Flores, Anna Gelpern, Douglas Guilfoyle, Mitu Gulati, Sean Hagan, Dan Jackson, Andrew Leyden, Yan Liu, Hernań Pe´rez Loose, Stefan Maier, Frank Michelman, Marko Milanovic, Christoph Paulus, Kunibert Raffer, Maurizio Ragazzi, Anthea Roberts, David Sabel, Stephan Schill, Hal Scott, Brad Setser, Alejandro Turyn, Cyrus Veeser, Mark Weidemaier, Ralph Wilde, Sir Michael Wood, Philip Wood, Andrew Yianni, Rumiana Yotova and Deborah Zandstra. Karin Bosshard, Emmanuel Cruz, Olivia Dhein, Ulrike Franke, Judy Fu, Florence Hediger, Tobias Lehman, Daniel Peat, Jil Schwieger, Stefan Sikl and Lucija Zigrovic assisted in revising the manuscript in 2010. The London School of Economics and Political Sciences provided a stimulating research environment from 2004 to 2007. As an ideal counterbalance to my research, the Economics Department afforded me the opportunity to teach economic policy. Throughout, Silvana Tenreyro, the supervisor of my dissertation, has been a great source of academic advice and deepened my understanding of macroeconomics. Thanks also to the Lauterpacht Centre for International Law and Downing College at the University of Cambridge for hospitality, first during a productive three-month research stay in 2006 and early 2007, and again when revising the thesis for publication as a book as a British Academy Postdoctoral Fellow from 2008 onwards. I am also immensely grateful to Cambridge’s diverse and enthusiastic group of international lawyers. Sarah Nouwen, my officemate and international lawyer extraordinaire, was as inspiring as she was supportive. Generous financial assistance from the Austrian Academy of Sciences (DOC scholarship 2006), the University of Vienna (Fo ¨rderstipendium 2005) enabled me to engage in full-time writing. From October 2008 onwards, the British Academy provided generous financial support under its Postdoctoral Fellowship Programme (2008–11) for which I am most grateful. While I was researching and writing, Darshini added much colour and meaning to it all. Her smile is a constant companion, no matter the hour: ‘To bien zoli’.

preface

xvii

At Cambridge University Press, Finola O’Sullivan, Nienke van Schaverbeke, Richard Woodham, Daniel Dunlavey, Rosina di Marzo, Kate Mertes and others have been a pleasure to work with throughout. The help of Laurence Marsh at the copy-editing stage was indispensable. I thank them for their dedication and patience. The book reflects developments up to August 2010. My parents, Eva Maria and Gottfried, taught me to love life and learning. For making this work and everything else possible, I dedicate ¨ r all this book to them. Liebe Mama, Lieber Papa: ganz herzlichen Dank fu ¨ tzung. Eure Unterstu

Note: measuring sovereign liability over time

This book is full of numbers, mainly in US dollars ($) and British pounds (£), from the last two centuries. It is important to understand their magnitude in the historical context. Converting the face value of a sovereign bond issued in the 1870s or the value of German reparations under the Versailles Treaty into current values is no easy undertaking. The purpose of the conversions is to show the true economic significance of the sovereign liabilities that are at the heart of this book. The indicator that is most appropriate for comparing sovereign liabilities over time is the liability expressed as a percentage of GDP in the year it was assumed. GDP refers to the market value of all goods and services produced by an economy in a given year. Comparing a liability or expenditure with this measure tells us how much the equivalent liability or expenditure would be in the comparator year. The comparator year used throughout is 2009 (no data being yet available for 2010). For example, German war reparations under the Versailles Treaty were fixed at $12 billion. The equivalent debt today would be roughly $2.4 trillion. All financial figures that predate the year 1980 are converted into 2009 US dollars, or 2009 British pounds, using the relative share of GDP. In particular cases, the conversion using the GDP deflator – a measure of the average prices of goods and services in an economy – is also given for comparison as the second number in brackets. All conversions are done on the basis of MeasuringWorth, a tool for comparing currency values over time.1 There is invariably substantial 1

L. H. Officer and S. H. Williamson, ‘Computing “real value” over time with a conversion between UK pounds and US dollars, 1830 to present’, MeasuringWorth, 2009, www. measuringworth.com.

xviii

note

xix

variation in these numbers. These conversions are designed to give the order of magnitude. But there is no single ‘correct’ measure, and economic historians use several indicators depending on the context and purpose.

Table of cases

1. Investment cases Full citation

Abbreviated citation

Pages

ADC Affiliate Limited, ADC & ADMC Management Limited v Republic of Hungary (Award, 2 October 2006) ICSID Case No. ARB/03/16 Aguas del Tunari SA v Republic of Bolivia (Decision on Respondent’s Objections to Jurisdiction, 21 October 2005) ICSID Case No. ARB/ 02/3; (2005) 20 ICSID Rev 450 African Holding Company of America, Inc. and Socie´te´ Africaine de Construction au Congo SARL v Democratic Republic of the Congo (Sentence sur les dećlinatoires de compe´tence et la recevabilite´, 29 July 2008) ICSID Case No. ARB/05/21 AGIP v People’s Republic of the Congo (Award, 30 November 1979) Case No. ARB/77/1, 1 ICSID Rep 313–22 AWG Group v Republic of Argentina (Decision on Liability, 30 July 2010) UNCITRAL arbitration Bayview Irrigation District and others v United Mexican States (Award, 19 June 2007) ICSID Case No. ARB(AF)/05/1 Giovanna A. Beccara and Others v Argentine Republic (Procedural Order No. 3 – Confidentiality Order, 27 January 2010) ICSID Case No. ARB/07/5

ADC v Hungary

218, 222

AdT v Bolivia (Jurisdiction)

270

Africa Holding v DRC

304

AGIP v Congo (Award)

301

AWG v Argentina (Award)

101

Bayview v Mexico

239

Beccara v Argentina (Confidentiality Order)

18, 19

xx

table of cases

xxi

Full citation


Pages

Biwater Gauff (Tanzania) Limited v United Republic of Tanzania (Award, 24 July 2008) ICSID Case No. ARB/05/22 Booker PLC v Co-operative Republic of Guyana (Discontinuance Order, 11 October 2003) ICSID Case No. ARB/01/9 Burlington Resources and others v Ecuador and Petroecuador (Decision on Jurisdiction, 2 June 2010) ICSID Case No. ARB/08/5 Camuzzi International S.A. v Argentine Republic (Decision on Objections to Jurisdiction, 11 May 2005) ICSID Case No. ARB/03/02 CDC Group PLC v Republic of the Seychelles (Decision on Jurisdiction, 17 December 2003) ICSID Case No. ARB/02/14 Chevron Corporation and Texaco Petroleum Corporation v Republic of Ecuador (Interim Award, 1 December 2008) CME Czech Republic B.V. (The Netherlands) v Czech Republic (Partial Award, 13 September 2001) UNCITRAL arbitration CMS Gas Transmission Company v The Republic of Argentina (Decision of the Tribunal on Objections to Jurisdiction, 17 July 2003) ICSID Case No. ARB/01/8, (2003) 42 ILM 788 CMS Gas Transmission Company v Republic of Argentina (Award, 12 May 2005) ICSID Case No. ARB/01/8; (2005) 44 ILM 1205 CMS Gas Transmission Company v Republic of Argentina (Decision on Annulment, 25 September 2007) ICSID Case No. ARB/01/18 Continental Casualty Company v Argentine Republic (Award, 5 September 2008) ICSID Case No. ARB/03/9

Biwater Gauff v Tanzania (Award)

214, 228, 229, 300

Booker v Guyana

222

Burlington v Ecuador

142

Camuzzi v Argentina (Jurisdiction)

231

CDC v Seychelles (Jurisdiction)

221, 222

Chevron v Ecuador

142

CME v Czech Republic

294

CMS v Argentina (Jurisdiction)

35, 298

CMS v Argentina (Merits)

98, 101, 283, 296, 298

CMS v Argentina (Annulment)

100

Continental Casualty v Argentina (Award)

285

xxii

table of cases

Full citation


Pages

ˇeskoslovenska Obchodnı´ Banka, A.S. v C The Slovak Republic (Decision on Jurisdiction, 24 May 1999) ICSID Case No. ARB/97/4; (1999) 13 ICSID Rev 251–64 Deutsche Bank AG v Democratic Socialist Republic of Sri Lanka (pending) ICSID Case No. ARB/09/2 El Paso Energy International Company v Argentine Republic (Decision on Jurisdiction, 27 April 2006) ICSID Case No. ARB/03/15 Enron Corporation and Ponderosa Assets, LP v Argentine Republic (Award, 22 May 2007) ICSID Case No. ARB/01/3 Enron Corporation and Ponderosa Assets, LP v Argentine Republic (Decision on the Application for Annulment of the Argentine Republic, 30 July 2010) ICSID Case No. ARB/01/3 Mr Saba Fakes v Republic of Turkey (Award, 14 July 2010) ICSID Case No. ARB/09/11 Fedax NV v Republic of Venezuela (Award, 9 March 1998) ICSID Case No. ARB/96/3, 5 ICSID Rep 200; (1998) 37 ILM 1378; (1999) 24 Ybk Comm Arb 39; (1999) 126 JDI 276

CSOB v Slovakia

219, 220, 224–26, 233, 240, 243, 244, 248

Deutsche Bank v Sri Lanka

245

El Paso v Argentina (Jurisdiction)

226

Enron v Argentina (Merits)

99

Enron v Argentina (Annulment)

100

Fakes v Turkey (Award)

227, 234

Fedax v Venezuela

218, 219, 224–28, 233–38, 242, 243, 247–49, 257, 284, 298, 311, 312 298

Generation Ukraine Inc. v Ukraine (Award, 16 September 2003) ICSID Case No. ARB/00/9, 10 ICSID Rep 240; (2005) 44 ILM 404 Global Trading Resource Corp. and Globex International, Inc. v Ukraine (Award, 1 December 2010) ICSID Case No. ARB/09/11) Philippe Gruslin v Malaysia (Award, 27 November 2000) ICSID Case No. ARB/99/3 Hundekutter v Zimbabwe (Award, 22 April 2009) ICSID Case No. ARB/05/6

Generation Ukraine v Ukraine (Merits)

Globex v Ukraine (Award)

215, 222, 226, 227, 245

Gruslin v Malaysia

249

Hundekutter v Zimbabwe

211

table of cases

xxiii

Full citation


Pages

I&I Beheer v Bolivarian Republic of Venezuela (Proceedings discontinued, 28 December 2007) ICSID Case No. ARB/05/4 Impregilo SpA v Islamic Republic of Pakistan (Decision on Jurisdiction, 22 April 2005) ICSID Case No. ARB/03/3, 12 ICSID Rep 245 Joy Mining Machinery Limited v The Arab Republic of Egypt (Award on Jurisdiction, 6 August 2004) ICSID Case No. ARB/03/11; (1987) 26 ILM 647; (1988) 13 Ybk Comm Arb 35 Ronald S. Lauder v Czech Republic (Final Award, 3 September 2001) UNCITRAL, 9 ICSID Rep 66 Consorzio Groupement L.E.S.I. – Dipenta (Italie) v Re´publique Alge´rienne De´mocratique et Populaire (Award, 10 January 2005) ICSID Case No. ARB/03/08, (2004) 19 ICSID Rev 426 Liberian Eastern Timber Corp. (LETCO) v Liberia (Award, 31 March 1986) ICSID Case No. ARB/83/2, 2 ICSID Rep 358; (1987) 26 ILM 647; (1988) 13 Ybk Comm Arb 35 LG&E Energy Corp., LG&E Capital Corp. and LG&E International Inc. v Argentine Republic (Decision on Liability, 3 October 2006), 21 ICSID Rev 203 (2007); 46 ILM 36 (2006) Emilio Agustıń Maffezini v Kingdom of Spain (Award, 13 November 2000) ICSID Case No. ARB/97/7, 5 ICSID Rep 419, (2001) 16 ICSID Rev 248; (2003) 124 ILR 35 Malaysian Historical Salvors Sdn Bhd v Government of Malaysia (Decision on the Application of Annulment, 16 April 2009) ICSID Case No. ARB/05/10 Malaysian Historical Salvors Sdn Bhd v Government of Malaysia (Award, 17 May 2007) ICSID Case No. ARB/05/10

I&I Beheer v Venezuela

223

Impregilo v Pakistan

202, 218, 255, 268, 278, 279, 280

Joy Mining v Egypt (Jurisdiction)

213, 215, 221, 224, 226, 231, 236, 238, 256, 280 289

Lauder v Czech Republic (Merits) LESI v Algeria

230, 231, 234, 240–42

LETCO v Liberia (Merits)

301

LG&E v Argentina (Liability)

98

Maffezini v Spain (Merits)

275, 276, 294, 298

Malaysian Historical Salvors v Malaysia (Annulment)

214, 215, 224, 227, 228, 232, 250

Malaysian Historical Salvors v Malaysia (Merits)

215, 224, 230–32, 235, 298

xxiv

table of cases

Full citation


Pages

Metalclad Corporation v United Mexican States (Award, 30 August 2000) ICSID Case No. ARB(AF)/91/1, (2001) 6 ICSID Rev 168; (2001) 40 ILM 36; (2001) 26 Ybk Comm Arb 99; (2002) 119 ILR 618; (2002) 129 JDI 233 Methanex Corporation v United States of America (Final Award on Jurisdiction and Merits, 3 August 2005) UNCITRAL Mihaly International Corporation v Democratic Socialist Republic of Sri Lanka (Award, 15 March 2002) ICSID Case No. ARB/00/2, 6 ICSID Rep 310; (2002) 41 ILM 867; (2002) 17 ICSID Rev 142 Patrick Mitchell v Democratic Republic of the Congo (Decision on the Application for the Annulment of the Award, 1 November 2006) ICSID Case No. ARB/99/7 Mondev International Ltd v United States of America (Award, 11 October 2002) ICSID Case No. ARB(AF)/99/2, 7 ICSID Rep 192; (2003) 42 ILM 85; (2004) 123 ILR 110 Murphy Exploration and Production Company International v Republic of Ecuador (Award on Jurisdiction, 15 December 2010) ICSID Case No. ARB/08/4 Mytilineos v Serbia and Montenegro (Partial Award on Jurisdiction, 8 September 2006) UNCITRAL National Grid PLC v Argentine Republic (Decision on Jurisdiction, 20 June 2006) UNCITRAL Noble Energy, Inc. and Machalapower Cia Ltda v Ecuador and Consejo Nacional de Electricidad (Decision on Jurisdiction, 5 March 2008) ICSID Case No. ARB/05/12

Metalclad v Mexico (Merits)

289, 294

Methanex v USA (Merits)

203

Mihaly v Sri Lanka (Jurisdiction)

224

Mitchell v DRC (Annulment)

216

Mondev v USA (Merits)

202, 203, 294

Murphy v Ecuador

142

Mytilineos v Serbia

221

National Grid v Argentina (Jurisdiction) Noble v Ecuador (Jurisdiction)

276

255

table of cases

xxv

Full citation


Pages

Noble Ventures, Inc. v Romania (Award, 12 October 2005) ICSID Case No. ARB/01/11 Occidental Exploration and Production Company v The Republic of Ecuador (Final Award, 1 July 2004) LCIA Case No. UN 3467, 12 ICSID Rep 59 OKO Osuuspankkien Keskuspankki Oyj and Others v Republic of Estonia (Award, 19 November 2007) ICSID Case No. ARB/04/06 Eudoro A. Olguıń v Republic of Paraguay (Award, 26 July 2001) ICSID Case No. Arb/98/5, 18 ICSID Rev 143 Perenco Ecuador v Ecuador and Petroecuador (pending), ICSID Case No. ARB/08/6 Phoenix Action v Czech Republic (Award, 15 April 2009) ICSID Case No. ARB/06/5 Plama Consortium Limited v Republic of Bulgaria (Decision on Jurisdiction, 8 February 2005) ICSID Case No. ARB/03/24, (2005) 20 ICSID Rev 262, (2005) 44 ILM 721 Pope & Talbot, Inc. v Government of Canada (Award in Respect of Damages, 31 May 2002), 41 ILM 1347, (2003) 97 AJIL 937–50 PSEG Global, Inc., The North American Coal Corporation, and Konya Ilgin Elektrik ¨ retim ve Ticaret Limited Sirketi v Turkey U (Decision on Jurisdiction, 4 June 2004) ICSID Case No. ARB/02/5 Renta 4 v Russian Federation (Award on Preliminary Objections, 20 March 2009) Stockholm Chamber of Commerce Arbitration Repsol YPF Ecuador, S.A. and others v Republic of Ecuador and Empresa Estatal Petro´leos del Ecuador (PetroEcuador) (pending), ICSID Case No. ARB/08/10

Noble Ventures v Romania (Merits)

259

Occidental v Ecuador

142

OKO Pankki Oyj v Estonia (Merits)

223

Olguıń v Paraguay (Merits)

236, 282, 300

Perenco v Ecuador

142

Phoenix Action v Czech Republic

227, 229, 230

Plama v Bulgaria (Jurisdiction)

255, 276

Pope & Talbot v Canada

290

PSEG Global v Turkey

258

Renta 4 v Russian Federation

223, 239, 249, 250

Repsol v Ecuador

142

xxvi

table of cases

Full citation


Pages

Consortium RFCC v Royaume du Maroc (Award, 22 December 2003) ICSID Case No. ARB/00/6 RSM Production Corp. v Grenada (Award, 13 March 2009) ICSID Case No. ARB/05/14 Salini Costruttori SpA and Italstrade SpA v Kingdom of Morocco (Decision on Jurisdiction, 23 July 2001) ICSID Case No. ARB/00/4, 6 ICSID Rep 400, (2005) 44 ILM 569 Saluka Investments BV (The Netherlands) v The Czech Republic (Partial Award, 17 March 2006), UNCITRAL/PCA Sempra Energy International v Argentine Republic (Award on Merits, 28 September 2007) ICSID Case No. ARB/02/16 Sempra Energy International v Argentine Republic (Decision on the Argentine Republic’s Application for Annulment of the Award, 29 June 2010) ICSID Case No. ARB/02/16 Socie´te´ Geńe´rale de Surveillance S.A. v Islamic Republic of Pakistan (Decision on Objections to Jurisdiction, 6 August 2003) ICSID Case No. ARB/01/13, 8 ICSID Rep 406, (2003) 18 ICSID Rev 307, 42 ILM 1290 Socie´te´ Geńe´rale de Surveillance S.A. v Republic of the Philippines (Decision on Objections to Jurisdiction, 29 January 2004) ICSID Case No. ARB/ 02/6, 8 ICSID Rep 518 Socie´te´ Ouest Africaine des Be´tons Industriels v State of Senegal (Award on the Merits, 25 February 1988) ICSID Case No. ARB/82/1, (1994) 2 ICSID Rep. 164 Southern Pacific Properties (Middle East) Limited v Arab Republic of Egypt (No. 2) (Jurisdiction, 14 April 1988) ICSID Case No. ARB/84/3, 3 ICSID Rep 131, (1991) 16 Ybk Comm Arb 28

RFCC v Morocco (Merits)

202, 258, 278, 279, 300

RSM v Grenada

229

Salini v Morocco

227–29, 231, 234, 235

Saluka v Czech Republic

236, 298, 300, 321, 326

Sempra v Argentina (Award on Merits)

223, 240, 280

Sempra v Argentina (Annulment)

100, 101, 240

SGS v Pakistan

226, 268, 269

SGS v Philippines

215, 249, 255, 257, 260, 261, 262, 269, 270, 272, 283, 294

SOABI v Senegal

220

SPP v Egypt (Jurisdiction)

202, 268, 272

table of cases

xxvii

Full citation


Pages

Suez, Sociedad General de Aguas de Barcelona S.A. and InterAgua Servicios Integrales del Agua S.A. v Argentine Republic (Decision on Liability, 30 July 2010) ICSID Case No. ARB/03/17 Suez, Sociedad General de Aguas de Barcelona S.A. v Argentine Republic (Decision on Liability, 30 July 2010) ICSID Case No. ARB/03/18 Suez, Sociedad General de Aguas de Barcelona S.A. and Vivendi Universal S.A. v Argentine Republic (Decision on Liability, 30 July 2010) ICSID Case No. ARB/03/19 Tećnicas Medioambientales Tecmed S.A. v United Mexican States (Award, 29 May 2003) ICSID Case No. ARB(AF)/ 00/2, 10 ICSID Rep 134, 19 ICSID Rev 158, (2004) 43 ILM 133 Telenor Mobile Communications AS v Republic of Hungary (Award, 13 September 2006) ICSID Case No. ARB/04/15 Tokios Tokele´s v Ukraine (Decision on Jurisdiction, 29 April 2004) ICSID Case No. ARB/02/18, 11 ICSID Rep 313, (2005) 20 ICSID Rev 205 TSA Spectrum de Argentina S.A. v Argentine Republic (Award, 19 December 2008) ICSID Case No. ARB/05/5 Victor Pey Casado et Fondation ‘Presidente Allende’ v Re´publique du Chili (Sentence Arbitrale, 8 May 2008) ICSID Case No. ARB/98/2 Compan ˜´ıa de Aguas del Aconquija S.A. and Compagnie Geńe´rale des Eaux/ Vivendi Universal v Argentine Republic (Decision on Annulment, 3 July 2002) ICSID Case No. ARB/97/3, 6 ICSID Rep 340

Suez v Argentina I

101, 291

Suez v Argentina II

291

Suez v Argentina III

101, 291

Tecmed v Mexico (Merits)

279, 290, 291

Telenor v Hungary (Jurisdiction)

262

Tokios v Ukraine (Jurisdiction)

213

TSA v Argentina

258

Victor Pey Casado v Chile

232, 233

Vivendi v Argentina No. 1 (Annulment)

254, 255, 267, 268

xxviii

table of cases

Full citation


Pages

Compan ı de Aguas del Aconquija S.A. ˜á and Vivendi Universal S.A., v Argentine Republic (Decision on the Argentine Republic’s Request for Annulment of the Award rendered on 20 August 2007, 10 August 2010) ICSID Case No. ARB/97/3 Waste Management Inc. v United Mexican States (No. 2) (Award, 30 April 2004) ICSID Case No. ARB (AF)/00/3, 11 ICSID Rep 361, (2004) 43 ILM 967, (2004) 98 AJIL 838–840

Vivendi v Argentina No. 2 (Annulment)

255, 257

Waste Management v Mexico No. 2

282, 293, 294

In re Accounts of Ka¨the Friedla¨nder

315

Arbitral Award of Rapperschwyl Bulbank v A.I. Trade

139

2. Other arbitration cases In re Accounts of Ka¨the Friedla¨nder, Holocaust Claims Resolution Tribunal, 4 April 2004, Case No. CV96-4849; Claim Number 213599/RT Arbitral Award of Rapperschwyl (France v Chile), 5 July 1901 Bulgarian Foreign Trade Bank Limited v A.I. Trade Finance Inc., 27 October 2000, UNCITRAL arbitration Canevaro Brothers (Italy v Peru), 3 May 1912, (1912) 6 AJIL 746; 39 JDI 1317 Cerruti Arbitrations (Italy v Colombia), (Award, 6 July 1911) (1912) 6 AJIL 965–75; (1912) RGDIP 268–74 In re City of Tokyo 5 Per Cent Loan of 1912 – Plan for Resumption of Payment of Principal and Interest on the French Tranche of the Loan, Conciliation, 1 April 1960, 29 ILR 11–20 Claims arising out of Decisions of the Mixed Greco-German Arbitral Tribunal set up under Article 304 in Part X of the Treaty of Versailles, Arbitral Tribunal for the Agreement on German External Debt, 26 January 1972, 19 RIAA 27–64

155

Canevaro Brothers Case (Italy v Peru)

73, 74, 75, 138

Cerruti Arbitrations (Italy v Colombia)

30

In re City of Tokyo 5 Per Cent Loan of 1912

83, 87

Claims re Decisions of the Mixed Greco-German Arbitral Tribunal (1972)

152

table of cases

Full citation


Pages

Charles R. Crane (United States v Austria and City of Vienna) Agreement of 26 November (1925) 6 UNRIAA 244 Socie´te´ Civile des Porteurs d’Obligations du Cre´dit Foncier Mexicain, Award No. 79, Feller, 122–23 Arbitral Tribunal of Interpretation, Created under the Provisions of the Annex II to the London Agreement of 9 August 1924 between the Reparation Commission and the GermanGovernment,AwardNo.II,29 January 1927, 21 (1927), AJIL, 344–49 Arbitral Tribunal of Interpretation, Created under the Provisions of the Annex II to the London Agreement of 9 August 1924 between the Reparation Commission and the German Government, Award No. III, 29 May 1928, 22 (1928), AJIL, 913–20 Re Dues For Reply Coupons Issued in Croatia; Re Transit Charge for Mails From Occupied Yugoslavia (Postal Administration of Portugal v Postal Administration of Yugoslavia), 17 March (1956) 23 ILR 591–96; (1956) 81 (9) L’Union Postale, 90A. Egyptian Workers’ Claim, United Nations Compensation Commission, Report and Recommendation on Jurisdiction and the Merits, 7 July 1995, 117 ILR 195–242 Energoinvest v DRC and Socie´te´ Nationale d’Electricite´, 30 April 2003, ICC Arbitration Dreyfus Brothers and Company v Peru (‘French Claims against Peru’) (France v Peru), 11 October 1921, Arbitration under Chapter IV of the Hague Convention of 18 October 1907 for the Pacific Settlement of International Disputes, Permanent Court of Arbitration, (1922) 16 AJIL 480–84; I UNRIAA 215–22

Crane v Austria (US v Austria)

59, 82

Cre´dit Foncier Mexicain v Mexico

171

Dawes Award II (1927)

149

Dawes Award III (1928)

149

Re Dues For Reply Coupons Issued in Croatia (Portugal v Yugoslavia)

141

Egyptian Workers’ Claim

283

Energoinvest v DRC

154

French Claims against Peru (France v Peru)

138

xxix

xxx

table of cases

Full citation


Pages

International Financial Commission v Greece, Award of Arbitrator Moriaud, November 1928 C. Itoh Middle East E.C. v The People’s Republic of the Congo and the Congolese Redemption Fund, ICC Arbitration No. 6219, 31 July 1990 Norwegian Shipowners’ Claims (Norway v USA), (Award, 13 October 1922), (1948) 1 UNRIAA, 307–46 Orinoco Steamship Company v Venezuela (1906), 6 Moore, International Law Digest 305 Ottoman Public Debt Arbitration, 18 April 1925, 1 UNRIAA 529–614; (1925–1926) 3 ILR 78–79 Russian Indemnity Case (Russia v Turkey), Award of the Arbitral Tribunal of 11 November 1912, (1913) 7 AJIL 178–201; (1912) 11 UNRIAA 431 Claims of the San Domingo Improvement Company of New York and its Allied Companies (United States v Dominican Republic), Arbitration under the Protocol of 31 January 1903, Award, 12 April 1904, FRUS 1904, 274–79 Social Insurance (Upper Silesia) Case, Arbitral Tribunal for the Interpretation of the Experts’ Plan under the Agreement of London of August 9, 1924, 24 March 1926, Cooke (Arbitrator); (1926) 20 AJIL 556; Die Entscheidungen des internationalen Schiedsgerichts zur Auslegung des Dawes-Plans (Schoch, ed.) (1927), vol. 1, 184; (1925–1926) 3 ILR 349–51 Switzerland v Federal Republic of Germany, Arbitral Tribunal for the Agreement on German External Debt, (1958) 19 Zao ¨RV 761; (1958) 34 BYBIL 363

IFC v Greece

44, 45

Itoh v People’s Republic of the Congo (ICC)

152, 155

Norwegian Shipowners’ Claims

202

Orinoco Steamship v Venezuela

266

Ottoman Public Debt Arbitration

129, 130–33

Russian Indemnity Case

89–97, 139, 205

United States v Dominican Republic (1904)

47, 51

Social Insurance (Upper Silesia) Case

149, 150

Switzerland v Germany

151

table of cases

xxxi

Full citation


Pages

Tinoco Arbitration (Great Britain v Costa Rica), 18 October 1923, (1924) 2 ILR 34–39; (1924) 18 AJIL 147–74; (1922) 116 BFSP 438–43; 1 UNRIIA 369 United States of America ex rel. Continental Insurance Company v Japan, 20 July 1960, US–Japanese Property Commission, 29 ILR 431–37 Venezuelan Preferential Case, Protocol of Washington of 7 May 1903, Award of the Arbitral Tribunal, 22 February 1904, 9 UNRIAA 99–110 Young Loan Arbitration (Belgium, France, Switzerland & UK v Germany), (Decision, 16 May 1980), 19 UNRIAA 67–145; (1980) 59 ILR 524 Biens Britanniques au Maroc Espagnol (Rećlamation 53 de Melilla - Ziat, Ben Kiran) (Great Britain v Spain) (1925), 2 UNRIAA 729

Tinoco Arbitration (Great Britain v Costa Rica)

136, 137, 140

US Continental Insurance Company v Japan

81

Venezuelan Preferential Case

30–35, 50, 55, 204

Young Loan Arbitration

67, 75–80, 83, 87, 144–148, 160

Ziat, Ben Kiran Arbitration

170

3. Foreign Claims Settlement Commission of the United States Albert C. Schwarting v Bulgaria, Claim No. BUL-2–016, Decision No. BUL-2–8, 30 September 1970 American Cast Iron Pipe Company v Cuba, Claim No. CU-0249, Decision No. CU-13, 19 October 1966 Ann A. Unger v Czechoslovakia, Claim No. CZ-3137, CZ-3138 and CZ-3142, Decision No. CZ-3538, 17 FCSC Rep 262 Artus v German Democratic Republic, Claim No. G-2887; Decision No. G-3085, 4 February 1981 Bert McCord v Soviet Union, Claim No. SOV-40033, Decision No. SOV-1493, 10 FCSC Rep 181

Schwarting v Bulgaria

191

American Cast Iron Pipe v Cuba

189

Unger v Czechoslovakia

189

Artus v GDR

193

McCord v Soviet Union

307

xxxii

table of cases

Full citation


Pages

Bessie M. Marcus v Cuba, Claim No. CU-1752; Decision No. CU-254, 10 April 1968 Bill Lacey v Cuba, Claim No. CU4854, Decision No. CU-2641, 14 July 1971 Carl Joseph Baird v Soviet Union, Claim No. SOV-40744, Decision No. SOV-1939, 10 FCSC Rep 193 Chalifoux v Soviet Union, 27 May 1957, 10 FCSC Rep 194; 26 ILR 272–73 Charles D. Siegel v Soviet Union, Claim No. SOV-40017, Decision No. SOV-230, 10 FCSC Rep 187; 26 ILR 275 Charles H. Sisam v Czechoslovakia, Claim No. CZ-1551, Decision No. CZ-397, 17 FCSC Rep 197 Charles Simonek v Czechoslovakia, Claim No. CZ-3147, Decision No. CZ-2299, 7 September 1960, 14 FCSC Rep 174 Claire Claus v Czechoslovakia, Claim No. CZ-1082, Decision No. CZ-683, 17 FCSC Rep 201 Deere & Company v Cuba, Claim No. CU-2392; Decision No. CU-1150, 7 August 1968 Dora Frankenbusch v Czechoslovakia, Claim No. CZ-2474, Decision No. CZ-2380 Doris Abbott Hedges, Individually and Doris Abbott Hedges, as Mother and Natural Guardian of Maria Teresa Hedges, Claim No. CU-3436, Decision No. CU-5727, 28 October 1970 Elastic Stop Nut Corporation of America v Cuba, Claim No. CU-0195, Decision No. CU-304, 20 September 1967 Ella Wyman, et al. v Czechoslovakia, Claim Nos. CZ-4347 and CZ4348, Decision No. CZ-3529

Marcus v Cuba

169

Lacey v Cuba

306

Baird v Soviet Union

194

Chalifoux v Soviet Union

193, 194

Siegel v Soviet Union

191, 192, 194

Sisam v Czechoslovakia

194

Simonek v Czechoslovakia

189

Claus v Czechoslovakia

286

Deere v Cuba

169

Frankenbusch v Czechoslovakia

194

Hedges v Cuba

169

Elastic Stop Nut v Cuba

190

Wyman v Czechoslovakia

288

table of cases

Full citation


Pages

Emil Bohadlo v Czechoslovakia, Claim No. CZ-1734, Decision No. CZ-379, 17 FCSC Rep 196 Eric G. Kaufmann v Yugoslavia, Claim No. Y-778, Decision No. Y-393, FCSC D&A 118 Erwin P. Hexner v Czechoslovakia, Claim No. CZ-2408, CZ-3255, and CZ-3290, Decision No. CZ-2470, 17 FCSC Rep 266 Eugene L. Beyl v Romania, Claim No. RUM-2–036; Decision No. RUM2–004, 14 October 1970 Feierabend v Czechoslovakia, Claim No. CZ-2529, Decision No. CZ-1423, 7 September 1960, 42 ILR 157–61 Felix Wolf v Yugoslavia, Claim No. Y-874, Decision No. Y-385, 22 November 1961, 17 FCSC Rep 231; 42 ILR 161–62; FCSC D&A 118 First National City Bank v Cuba, Claim No. CU-2629; Decision No. CU-1868, 20 October 1971 First National City Bank of New York v Soviet Union, Claim No. SOV41261, Decision No. SOV-3126, 15 July 1959, FCSC D&A 324–41 F. J. Killkalee v Cuba, Claim No. CU-1002, Decision No. CU-203, 31 January 1968 Gordon Theophilus Malan v Italy, Claim No. IT-10066, Decision No. IT-434, FCSC D&A 292–94 Green Claim v Soviet Union, 6 November 1957 10 FCSC Rep 205; 26 ILR 341–42 Guaranty Trust Company of New York v Soviet Union, 10 FCSC Rep 224 Hedwiga Geller v Hungary, 12 April 1957, 10 FCSC Rep 38; 26 ILR 262–66 Helen Modell v Soviet Union, Claim No. SOV-40836, Decision No. SOV-2256, 10 FCSC Rep 201

Bohadlo v Czechoslovakia

288

Kaufmann v Yugoslavia

287

Hexner v Czechoslovakia

189

Beyl v Romania

191

Feierabend v Czechoslovakia

286, 287

Wolf v Yugoslavia

287

First National City Bank v Cuba

195

First National City Bank of New York v Soviet Union

306

Killkalee v Cuba

169

Malan v Italy

190, 191

Green Claim v Soviet Union

194

Guaranty Trust v Soviet Union Geller v Hungary

194

Modell v Soviet Union

307

195

xxxiii

xxxiv

table of cases

Full citation


Pages

Ignatius A. Pietrzak v Poland, Claim No. PO-1004, Decision No. PO-1, 27 February 1961 Ivan Baran v Yugoslavia, Claim No. Y-1694, Decision No. Y-341, FCSC D&A 118 James De Marco v Italy, Claim No. IT-10086, Decision No. IT-249, 10 FCSC Rep 142 John Stipkala v Czechoslovakia, Claim No. CZ-1616, Decision No. CZ-135, 17 FCSC Rep 191 Jon M. Groetzinger v German Democratic Republic, Claim No. G-3160; Decision G-3271, 13 May 1981 Joseph Smolik v Czechoslovakia, Claim No. CZ-4032, Decision No. CZ-3417 (1961) Jovo Miljus v Yugoslavia, Claim No. Y-1561, Decision No. Y-352-A; FCSC D&A 117; 20 ILR 434 Koloman Lebovic v Czechoslovakia, Claim No. CZ-2–0047, Decision No. CZ-0664 Marietta J. Poras v Czechoslovakia, Claim No. CZ-3020, Decision No. CZ-3528, 17 FCSC Rep 256 Mellon National Bank and Trust Company v Cuba, Claim No. CU-2498, Decision No. CU-2883, 20 October 1971 Michael Tomasko v Czechoslovakia, Claim No. CZ-2–0319, Decision No. CZ-2–0268 Mitar Paige v Yugoslavia, Claim No. Y2–0143, Decision Y2–12, 6 September 1967 Morgan Guaranty Trust Company of New York, as Trustee v Cuba, Claim No. CU-1594, Decision No. CU-134, 25 October 1967 Owen Arthur Nash v Yugoslavia, Claim No. Y-363, Decision No. Y-38, FCSC D&A 118; 20 ILR 213–14

Pietrzak v Poland

286

Baran v Yugoslavia

287

De Marco v Italy

191

Stipkala v Czechoslovakia

287

Groetzinger v GDR

189

Smolik v Czechoslovakia

189

Miljus v Yugoslavia

287

Lebovic v Czechoslovakia

287

Poras v Czechoslovakia

189

Mellon Bank v Cuba

189

Tomasko v Czechoslovakia

286

Paige v Yugoslavia

193

Morgan Guaranty Trust Company of New York, as Trustee v Cuba

195

Nash v Yugoslavia

194, 287

table of cases

xxxv

Full citation


Pages

Penelope Dauphinot, Mother and Natural Guardian of Cassandra Dauphinot, a Minor, Claim No. CU-8432, Decision No. CU-6042, 3 February 1971 Peyton Randolph Harris v Soviet Union, Claim No. SOV-41840, Decision No. SOV-2975, 10 FCSC Rep 216 Robert F. Sanchez, Executor of the Estate of Marita Dearing de Lattre, Deceased v Cuba, Claim No. CU-0116, Decision No. CU-3559, 18 March 1969 Ruth I. Mende v German Democratic Republic, Claim No. G-2196, Decision No. G-0981, 11 July 1979 Sanders and Niewald v Cuba, Claim No. CU-0032, Decision No. CU-2117, 24 July 1968 Serguis Martin Riis v Soviet Union, Claim No. SOV-40695, Decision No. SOV-960, 4 September 1957, 10 FCSC Rep 200; 26 ILR 274–75 The Singer Manufacturing Company v Soviet Union, Claim No. SOV40920, Decision No. SOV-3128, FCSC D&A 347–63 Skins Trading Corporation v Czechoslovakia, 23 May 1960, Claim No. CZ-3978, Decision No. CZ-734, 17 FCSC Rep 202, 42 ILR 155–57 Sophia Predka v Poland, Claim No. PO-1178, Decision No. PO-2491, 12 February 1964, FCSC D&A 527–31 Standard Oil Company Claim, 20 May 1959, 10 FCSC Rep 128; 30 ILR 170–80 Susan Erskine Rogers v Soviet Union, Claim No. SOV-40208, Decision No. SOV-1437, 10 FCSC Rep 180

Dauphinot v Cuba

306

Harris v Soviet Union

194

de Lattre v Cuba

190

Mende v GDR

190

Sanders and Niewald v Cuba

288

Riis v Soviet Union

194

Singer Manufacturing v Soviet Union

190, 288

Skins Trading Corporation v Czechoslovakia

190, 285, 286, 287

Predka v Poland

288

Standard Oil Company Claim

314, 315

Rogers v Soviet Union

194

xxxvi

table of cases

Full citation


Pages

Toni Felix v Czechoslovakia, Claim No. CZ-2097, Decision No. CZ-2322, 17 FCSC Rep 231 Universal Pictures Co., Inc. v Yugoslavia, Claim No. Y-1509, Decision No. Y-361; FCSC D&A 117 Virginia Howard v Yugoslavia, Claim No. Y-1282, Decision No. Y-1269, 15 September 1954, FCSC D&A 112–15 Walter Friedlander v Italy, Claim No. IT-10425, Decision No. IT-458, 10 FCSC Rep 152 Warren Brothers Company v Poland, Claim No. PO-5988, Decision No. PO-9318, 23 FCSC Rep 71 Welthy Kiang Chen v People’s Republic of China, Claim No. CN-2-015, Decision No. CN-2-055, 1 April 1981 William S. Smyth v Yugoslavia, Claim No. Y-1473, Decision No. Y-1354 Zentler v Romania, Claim No. RUM30044, Decision No. RUM-4, 10 April 1957, 10 FCSC Rep 95; 26 ILR 258–62; FCSC D&A 237–43 Zofia Walag v Czechoslovakia, Claim No. CZ-1734, Decision No. CZ-379, 17 FCSC Rep 196 Zuk Claim (1958) ILR 284; FCSC, 10th Semiannual Report, 30 June 1959, 172–73

Felix v Czechoslovakia

288

Universal Pictures v Yugoslavia

189

Howard v Yugoslavia

189, 190

Friedlander v Italy

191

Warren Brothers v Poland

289

Kiang v China

285

Smyth v Yugoslavia

189

Zentler v Romania

194, 284

Zofia Walag v Czechoslovakia

289

Zuk Claim (1958)

59

4. Iran–US Claims Tribunal Dallal v The Islamic Republic of Iran, Bank Mellat, Award No. 53–149–1, 10 June 1983, 3 Iran–US CTR 10; 75 ILR 127 Eastman Kodak Co. v The Islamic Republic of Iran, Award No. 329–227–3, 11 November 1987, 17 Iran–US CTR 153

Dallal v Iran, Bank Mellat

188

Eastman Kodak v Iran

315

table of cases

Full citation


Pages

INA Corporation v The Islamic Republic of Iran, Award No. 184-161-1, 13 August 1985, 8 Iran–US CTR 373 Oil Field of Texas v The Islamic Republic of Iran, 9 December 1982, 1 Iran–US CTR 347 Starrett Housing Corp. v The Islamic Republic of Iran, Interlocutory Award, 19 December 1983, 4 Iran–US CTR 122 Starrett Housing Corp. v The Islamic Republic of Iran, Final Award No. 314–24–1, 14 August 1987, 16 Iran–US CTR 112 Uiterwyk Corp et al. v The Islamic Republic of Iran, Final Award No. 501–381–1, 8 January 1991

INA v Iran

315

Oil Field of Texas v Iran

170, 171

Starrett Housing v Iran (Interlocutory Award) Starrett Housing v Iran (Final Award)

298, 299

Uiterwyk v Iran

188

xxxvii

188

5. Mixed claims commissions Alsop (US v Peru), Moore, Arbitrations, vol. 3, 1627–28 Aspinwall, Executor of G. G. Howland et al. (‘Venezuelan Bond Cases’) (USA v Venezuela), 5 December 1885, Moore,Arbitrations,vol4,3616–50 Ballistini (France v Venezuela), 27 February 1903, 10 UNRIAA 18; Ralston, Law and Procedure, No. 98, 80 Boccardo (Italy v Venezuela), 13 February 1903, Ralston, Law and Procedure, No. 99, 80 Chase Case, Moore, Arbitrations, vol. 4, 3472; Ralston, Law and Procedure, 73 Claims of Mr Pacifico upon the Portuguese Government (Great Britain v Greece), 5 May 1851, Recueil Arbitrages, vol. 1 (1798–1855), 580–97 Compagnie Geńe´rale des Eaux de Caracas (‘Belgian Waterworks’) (Belgium v Venezuela), 7 March 1903, Ralston, Law and Procedure, 78–79, 9 UNRIAA 329 (1903)

Alsop (US v Peru)

169

Aspinwall Case (USA v Venezuela)

176, 177, 179, 181, 205, 305

Ballistini (France v Venezuela)

180, 305

Boccardo (Italy v Venezuela)

179, 180

Chase Case

304

Pacifico Claim (Great Britain v Greece)

30

Compagnie Geńe´rale des Eaux de Caracas (Belgium v Venezuela)

169, 179, 180, 244

xxxviii t a b l e o f c a s e s

Full citation


Pages

Philip Dawson – Texas Bond Cases, No. 15 (Great Britain v US), 29 November 1854, Moore, Arbitrations, vol 4, 3591–94; Moore, Digest, vol. 4, 1906, 343–47; Recueil arbitrages, vol. 1 (1798–1855), 683–85; Hornby, Private Claims, 164–90 Dickson Car Wheel Company (United States of America v United Mexican States), Mexico–US General Claims Commission, July 1931, (1952) IV UNRIAA 669–91 Dame S. R. Gologan et al. v Germany, Roumano-German Mixed Arbitral Tribunal, 18 January 1926, 3 ILR 406–07 Du Pont, de Nemours & Co. v Mexico (‘Claim for Overdue Mexican Coupons’) (USA v Mexico), Convention of 4 July 1868, Moore, Arbitrations, vol. 4, 3616 Eldredge v Peru (US v Peru), 12 January 1863, Moore, Arbitrations, vol. 4, 3462 Flannagan, Bradley, Clark & Co. v Venezuela (USA v Venezuela), US–Venezuela Commission of 1889, Moore, Arbitrations, vol. 4, 3564; Ralston, Law and Procedure, No. 74, 60 Florida Bond Cases (Great Britain v USA), Anglo-American Claims Commission, 14 September 1854, Moore, Arbitrations, vol. 4, 3594; Recueil Arbitrages, vol. 1 (1798–1855), 758–62; Reports of Decisions of Anglo-American Claims Commission (1854), 246 French Company of Venezuela Railroads (France v Venezuela), French–Venezuelan Mixed Claims Commission (1902) 10 UNRIAA 285–355

Dawson v United States (Great Britain v US)

135, 136

Dickson Car Wheel Company Case

170

Gologan v Germany

150

Du Pont v Mexico (US v Mexico)

173, 174, 176, 181, 327

Eldredge v Peru (US v Peru)

311

Flannagan v Venezuela (USA v Venezuela)

177, 264, 267, 269, 270

Florida Bond Cases (Great Britain v USA)

134, 135

French Company of Venezuela Railroads Case

96–98

table of cases

xxxix

Full citation


Pages

General Finance Co., Decision No. 125-E, in American–Mexican Claims Commission: Report to the Secretary of State 247 (1948), 546–48 H. Milne McIntosh, Decision 17-C, in American–Mexican Claims Commission: Report to the Secretary of State 247 (1948), 364–67 Hofmann and Steinhardt, American–Turkish Claims Commission, in F. K. Nielsen (ed.), American-Turkish Claims Settlement: Opinions and Reports (Washington, DC: US Government Printing Office, 1937), 286–89 Holford – Texas Bond Cases, No. 14 (Great Britain v United States of America), 29 November 1854, Moore, Arbitrations, vol. 4, 3591–94; Moore, Digest, vol. 1, 1906, 343–47; Recueil Arbitrages, vol. 1 (1798–1855), 1905, 683–85; Hornby, Private Claims, 164–90 Illinois Central Railroad Co. (United States of America v United Mexican States), Mexico–US General Claims Commission, 6 December 1926, (1952) 4 UNRIAA 134–37 James Hammet Howard, British– Mexican Commission, Further Decisions and Opinions, 15; Feller, 183 International Fisheries Company (US v Mexico), Claims Commission of the United States and Mexico, Opinions of Commissioners (1931), 207 Jalapa Railroad and Power Co. v Mexico, 1948, American– Mexican Mixed Claims Commission, (1976) 8

General Finance v Mexico (US v Mexico)

189

McIntosh v Mexico (US v Mexico)

189

Hofmann and Steinhardt v Turkey (US v Turkey)

171, 189

Holford v United States (Great Britain v USA)

135, 136

Illinois Central Railroad v United Mexican States (US v Mexico)

175

Howard v Mexico (UK v Mexico)

176

International Fisheries Company (US v Mexico)

203, 204, 266

Jalapa Railroad v Mexico (US v Mexico)

278

xl

table of cases

Full citation Whiteman, Digest of International Law 908 Jarvis (USA v Venezuela), 17 February 1903, Ralston, Law and Procedure, 80–81 Kearney (US v Mexico), Ralston, Law and Procedure, 73 Keller v Mexico (US v Mexico), 4 July 1868, Moore, Arbitrations, vol. 4, 3065 Laredo Elec. & Ry. Co, Decision 2-D, in American–Mexican Claims Commission: Report to the Secretary of State 247 (1948) Manasse v Mexico (United States v Mexico), Ralston, Law and Procedure, 84; Moore, Arbitrations, vol. 4, 3463. Mexican Union Railway (Great Britain v Mexico), AngloMexican Claims Commission, Docket No. 36, Decision No. 21, 15 February 1930, 24 AJIL 388 Mora & Arango Case (US v Spain), Award, 22 February 1883, Moore, Arbitrations, vol. 3, 233 North American Dredging v Mexico, 31 March 1926, Docket No. 1223, 4 UNRIAA 26–31; AJIL 20 (1926) Oliva Case (Italy v Venezuela), Italian–Venezuelan Commission, 1903, (1956) 10 UNRIAA 600–09 Riggs, Oliver, Fisher (‘Colombian bond cases’) (USA v Colombia), 10 February 1864, Moore, Arbitrations, vol. 4, No. 440, 3612–20 Rogerio v Bolivia, Ralston, Law and Procedure, No. 88, 69 Rudloff Case (United States of America v Venezuela) (Interlocutory), 1905,


Pages

Jarvis (US v Venezuela)

137, 180

Kearney Case

304

Keller v Mexico (US v Mexico)

311

Laredo v Mexico (US v Mexico)

189

Manasse v Mexico

283

Mexican Union Railway (Great Britain v Mexico)

266

Mora & Arango (US v Spain)

169

North American Dredging v Mexico

264, 266

Oliva Case

179

Riggs, Oliver, Fisher (USA v Colombia)

174, 176, 177, 178, 181

Rogerio v Bolivia

266

Rudloff Case (Interlocutory)

179, 267, 269

table of cases

Full citation American–Venezuelan Commission, 9 UNRIAA 244–55 Rudloff Case (United States of America v Venezuela) (Merits), 1905, American–Venezuelan Commission, 9 UNRIAA 255–61 Debenture Holders of the San Marcos & Pinos Co (UK v Mexico), (1931) 5 UNRIAA 191 Shufelt Claim (USA v Guatemala), 24 July 1930, (1930) 2 UNRIAA, 1079–102 Taussig Case, Moore, Arbitrations, vol. 4, 3469; Ralston, Law and Procedure, 73 Woodruff Case (USA v Venezuela), Ralston, Law and procedure, No. 75, 62; 9 UNRIAA 213

xli


Pages

Rudloff Case (Merits)

175, 267, 269

San Marcos & Pinos v Mexico (UK v Mexico)

171

Shufelt v Guatemala

188

Taussig Case

304

Woodruff Case (USA v Venezuela)

255, 267, 268, 269

6. International Court of Justice Barcelona Traction, Light and Power Company Limited (Belgium v Spain), 5 February 1970 Certain Norwegian Loans (France v Norway), 1957 ICJ Rep, 9–95 Nottebohm Case (Liechtenstein v Guatemala), Judgment, 6 April 1955, ICJ Rep (1955) Oil Platforms (Islamic Republic of Iran v USA), Judgment on Preliminary Objections, 12 December 1996, 1996 ICJ Rep

Barcelona Traction (Second Phase)

36

Norwegian Loans Case (France v Norway)

38, 59, 60, 68–73, 80–87, 259, 289 263

Nottebohm Case (Liechtenstein v Guatemala) Oil Platforms (Islamic Republic of Iran v USA)

255

7. Permanent Court of International Justice Case Concerning the Payment in Gold of the Brazilian Federal Loans Issued in France (France v Brazil), Judgment No. 15, 1929 Series A, 90–155

Brazilian Loans (France v Brazil)

59–72, 85, 86, 139

xlii

table of cases

Full citation Case Concerning the Payment in Gold of the Serbian Federal Loans Issued in France (France v Serbia), Judgment No. 14, 1929 PCIJ Series A, 1–89 Free Zones of Upper Savoy and District of Gex, PCIJ Series A/B No. 46, 6 August 1931 Mavrommatis Palestine Concessions Case (Greece v United Kingdom), PCIJ Rep 1924, Series A, No. 2, Judgment of 30 August 1924 Oscar Chinn Case (UK v Belgium), Judgment, 12 December 1934, PCIJ Series A/B, No. 63 (1934) Socie´te´ Commerciale de Belgique, 1939 PCIJ Series A/B, 160–90 The S.S. Wimbledon case, PCIJ Series A No. 1 (1923)

Abbreviated citation Serbian Loans (France v Serbia)

Free Zones of Upper Savoy and District of Gex Mavrommatis (Greece v United Kingdom)

Pages 20, 55, 60–72, 81, 85, 86, 98, 104, 139, 176, 222, 282 326

263

Oscar Chinn Case (UK v Belgium)

300, 301

Socobelge (Belgium v Greece) The Wimbledon

94, 95, 96 176

8. European Court of Human Rights Abrial v France, Request No. 58752/00, 15 May 2001 Brumarescu v Romania, No. 28342/95, ECHR 1999-VII Burdov v Russia, 7 May 2002, ECHR 2002-III De Dreux-Bre´ze´ v France, Application No. 57969/00, ECHR, Judgment of 15 May 2001 Handyside v United Kingdom, 7 December 1976, Series A No. 24, para. 62 James v United Kingdom, 98 ECHR, Series A, 9 (1986) Kovacic and others v Slovenia, Application Nos. 44574/98, 45133/98, 48316/99, ECHR, 3 October 2008 Leschi v France, Request No. 37505/97, 22 April 1998 Lithgow v United Kingdom, 8 July 1996, Series A No. 102, 8 ECHR 329 Malysh and others v Russia, 11 February 2010, Application no. 30280/03

Abrial v France

185

Brumarescu v Romania

183

Burdov v Russia De Dreux-Bre´ze´ v France

183 183, 184

Handyside v UK

182

James v UK

302

Kovacic v Slovenia

187

Leschi v France

185

Lithgow v United Kingdom

185, 302

Malysh v Russia

185, 186

table of cases

xliii

Full citation


Pages

O.N. v Bulgaria, No. 35221/97, 6 April 2000 Les saints monaste`res v Greece, 9 December 1944, Series A No. 301-A Sciortino v Italy, No. 30127/96, 18 October 2001 Thivet v France, Request No. 57071/00, 24 October 2000

O.N. v Bulgaria Les saints monaste`res v Greece Sciortino v Italy

183 185

Thivet v France

185

Socobelge v Greece (1951)

97, 98

IBRD Opinion, Ecuador (2009)

142

Anisminic v Foreign Compensation Commission (1969) Donegal v Zambia (2007)

196

Emperor of Austria v Day and Kossuth

58

Dongola v Egypt (1891)

46

183

9. National courts (i) Belgium ´tat Socie´te´ commerciale de Belgique v l’E helleńique et la banque de Gre`ce, Tribunal civil de Bruxelles, 30 April 1951, [1951] JT 302; 18 ILR 3; RCDIP 41 (1952), 111

(ii) Ecuador Sentencia Interpretativa, No. 0001–09-SICCC, Case 0005–09-IC, 13 March 2009

(iii) England and Wales Anisminic Ltd v Foreign Compensation Commission [1969] 2 AC 147, [1969] 2 WLR 163 Donegal International Ltd v Zambia and Anor, EWHC 197 (Comm); [2007] All ER (D) 184 (Feb) Queen’s Bench Division The Emperor of Austria v Day and Kossuth (1861) De GF & J 217 (CA) (Lord Campbell LC)

122

(iv) Egypt Dongola v Egypt, Judgment of 9 February 1887, Revue de Droit International 1891, 285

xliv

table of cases

(v) France Full citation


Pages

´tat, Andre´ A. G. et al. v France, Conseil d’E No. 229040, 7 January 2004 Association française des porteurs d’emprunt russes v Russian Federation, Tribunal de Grande Instance de Versailles, 23 April 1999 ´tat, 13 January 1960, Re Campion, Conseil d’E (197) 39 ILR 427–29 C. Itoh Middle East E.C. (Bahrain) v The People’s Republic of the Congo and the Congolese Redemption Fund, Court of Appeal of Paris, First Chamber – Section C, 1999/07427, Order, 16 September 1999 ´tat, No. 309623, Ge´rard A. v France, Conseil d’E 11 December 2009 Groupement national de de´fense des porteurs de titres russes v France, Administrative Tribunal of Paris, 17 December 1993 Groupement national de de´fense des porteurs de ´tat, No. titres russes v France, Conseil d’E 199326, 11 October 1999 ´tat, Jean Claude U. v France, Conseil d’E No. 226489, 21 February 2003 M. Romain X. et al. v France, Conseil ´tat, No. 226490–236070, 12 March d’E 2003

Andre´ v France

84

AFPER v Russian Federation (1999)

184

Re Campion (1960)

44

Itoh v People’s Republic of the Congo (1999)

153

Ge´rard A. v France

184

GNDPTR v France (1993)

184

GNDPTR v France (1999)

184

Jean Claude U. v France

184

M. Romain X. v France

184

Argentina Necessity Case (Frankfurt)

122

Argentina Necessity Case (BVerfG)

88

LG Frankfurt (2004)

306

(vi) Germany Case No. 32 C 1511/02, Amtsgericht Frankfurt am Main, 6 May 2003, 58 JZ, 20, 969–1020, A. Reinisch, Note, ‘Wirksamkeit eines Arrestbefehls gegen den Staat Argentinien’ Argentina Necessity Case (Judgment), 2 BvM 1/03, Bundesverfassungsgericht, 8 May 2007, 60 (2007) NJW 2610; 101 (2007) AJIL 857–65 Case No. 2–21 O 381/02, Landgericht Frankfurt am Main, 31 October 2003, 15 (2004) NJWRR 1053

table of cases

xlv

(vii) Italy Full citation


Pages

Borri v Argentina, 21 May 2005, Cass. Sezioni Unite, No. 6532; ILDC 296 (IT 2005)

Borri v Argentina

122, 123

Bulbank (Court of Appeal)

155

Bulbank (City Court)

155

Bulbank (Supreme Court)

155

(viii) Sweden A.I. Trade Finance Inc. v Bulgarian Foreign Trade Bank Ltd, Svea Court of Appeal, 30 March 1999, 14(4) Mealey’s, A-1 (1999) Bulgarian Foreign Trade Bank Ltd v A.I. Trade Finance, Inc., Stockholm City Court, 10 September 1998, 31 (1) Mealey’s, A-1 (1998) Bulgarian Foreign Trade Bank Ltd v A.I. Trade Finance, Inc., Swedish Supreme Court, Case No T1881–99, 15 (2) Mealey’s, A-1 (2000)

(ix) United States A.I. Credit Corp. v The Government of Jamaica, 666 F Supp 629 (SDNY 1987) Allied Bank International v Banco Credito Agricola de Cartago, 757 F.2 516 (2nd Circuit 1985), H. Golsong, ‘Souveranita¨tsprivileg und Schuldendienst privater Anleihenehmer’ RIW 31, (1985), 1815–16 Banque Compafina v Banco de Guatemala, 583 F. Supp. 320 (SDNY 1984) Blagge v Balch, 162 U.S. 439 (1896) CIBC Bank and Trust Co. v Banco Central do Brasil, 886 F. Supp. 1105 (SDNY 1995) C. Itoh Middle East E.C. (Bahrain), through the real party in interest, National Fire Insurance Company of Pittsburgh, PA v People’s Republic of the Congo, and the Congolese Redemption Fund, District Court of Oklahoma County, No. CJ-2004–2179, 15 June 2004

A.I. Credit v Jamaica (1987)

125

Allied Bank v Banco de Cartago (1985)

123, 328

Compafina v Guatemala (1984) Blagge v Balch (1896) CIBC v Banco Central do Brasil

124

Itoh v People’s Republic of the Congo (Oklahoma, 2004)

153

169 304, 305

xlvi

table of cases

Full citation


Pages

C. Itoh Middle East E.C. (Bahrain), through the real party in interest, National Fire Insurance Company of Pittsburgh, PA v Internet Corporation for Assigned Names and Numbers, The People’s Republic of the Congo and the Congolese Redemption Fund, Superior Court, County of Los Angeles, West District, Case No. SC090220, 23 February 2007 Cre´dit Français International, S.A. v Sociedad Financiera de Comercio, S.A, C.A. 490 N.Y.S. 2d 670, 675–78 (Sup. Ct. N.Y. Co. 1985) DRFP LLC., d/b/a Skype Ventures v The Republica Bolivariana de Venezuela, US District Court for the Southern District of Ohio, Eastern Division, 13 February 2009, 2009 U.S. Dist. Lexis 11850 Eisner v United States, 5 January 1954, 117 F. Supp. 197, 48 (1954) AJIL, 503–04 Elliott Associates v Peru, 12 F. Supp. 2d 328 (SDNY 1998) Elliott Associates, L.P. v Banco de la Nacioń, 194 F.3d 363 (2d Cir 1999) Eternity Global Master Fund v Morgan Guaranty Trust Company of New York, 2003 WL 21305355, 4–6 Eternity Global Master Fund v Morgan Guaranty Trust Company of New York, 375 F.3d 168, 181 (2004) L’Europeénne de Banque v Venezuela, 700 F. Supp. 114 (SDNY 1988) FG Hemisphere Associates LLC v Democratic Republic of Congo & Others, CACV 373/2008 & CACV 43/2009, 10 February 2010 (pending appeal to Hong Kong Court of Final Appeal) Hernan Lopez Fontana, Marianna Mori de Lopez and Latinburg S.A. v The Republic of Argentina, F3d 04–4069-CV(L), 04–4074-CV(CON), 2005 WL 1655034 (2nd Cir NY) Juillard v Greenman, 110 U.S. 421 (1884)

Itoh v People’s Republic of the Congo (Los Angeles, 2007)

154

Cre´dit Français v Sociedad Financiera de Comercio (1985)

125

Skype v Venezuela (2009)

223

Eisner v United States (1954)

59

Elliott Associates v Peru

126, 127

Elliott Associates v Banco de la Nacioń Eternity v Morgan Guaranty (2003)

126, 127

Eternity v Morgan Guaranty (2004)

291, 292

Europeénne de Banque v Venezuela (1988) FG Hemisphere v DRC

124, 125 154, 155

Fontana v Argentina (2005)

277

Juillard v Greenman

58

291, 292

table of cases

xlvii

Full citation


Pages

Labadie v United States, 32 Ct. Cl. 368 (1896) Libra Bank Ltd v Banco Nacional de Costa Rica, 570 F. Supp. 870, 882 (SNDY 1983), 78 AJIL 443 Mississippi v Hezon A. Johnson, 25 Miss. 625–882 New State Ice Co. v Liebmann, 285 U.S. 262 (1932) Norman v Baltimore & Ohio Railroad Co., 294 U.S. 240 (1935) Perry v United States, 294 U.S. 330 (1935) Pravin Banker Assocs. v Banco Popular del Peru, 165 Bankr. 379, 371–82 (SNDY) Pravin Banker Assocs. v Banco Popular del Peru, 1995, 8 March 1995 (SDNY) Pravin Banker Assocs. v Banco Popular del Peru, 895 F. Supp. 660 (SNDY) Pravin Bankers Assocs., Ltd. v Banco Popular del Peru, 109 F.3d 850, 854 (2d Cir. 1997) Principality of Monaco v Mississippi, 292 U.S. 313 (1934) Republic of Argentina v Weltover, Inc., 504 U.S. 607 (1992); 100 ILR 509; 86 AJIL 820 Republic of Cuba v State of North Carolina, 242 U.S. 665 Securities and Exchange Commission v Unique Financial Concepts, 196 F 3d 1195, 1199 (11 Cir. 1999) Securities and Exchange Commission v W. J. Howey, 328 US 293, 298–99 (1946) State ex rel. Citizens Bank of Louisiana v Funding Board, 28 La. 249 Weilamann v. Chase Manhattan Bank, 192 N.Y.S.2d (1960), 54 AJIL 410

Labadie v United States (1896) Libra Bank v Banco Nacional de Costa Rica (1983)

169 122, 123

Mississippi v Johnson

3, 4

New State Ice v Liebmann

322

Norman v Baltimore & Ohio Railroad Perry v United States (1935) Pravin Banker v Peru (I)

58

Pravin Banker v Peru (II) (1995) Pravin Banker v Peru

58 126 126 126

Pravin Banker v Peru (2d Cir. 1997)

126

Monaco v Mississippi (1934)

7

Argentina v Weltover (1992)

121, 122

Cuba v North Carolina

7

SEC v Unique Financial (1999)

243

SEC v Howey (1946)

242

Citizens Bank of Louisiana v Funding Board Weilamann v Chase Manhattan Bank (1960)

3 198

Table of treaties

Treaties

Pages

Accordo tra il Governo della Repubblica Italiana ed il Governo della Repubblica Argentina sulla promozione e protezioni degli investimenti (Argentina–Italy), 22 May 1990, Gazzetta Ufficiale No. 204, supplemento ordinario No. 83, 31 August 1993 L’accord du 27 mai 1997 entre le gouvernement de la Re´publique Française et le gouvernement de la Fe´de´ration de Russie relatif au re`glement de´finitif des creánces rećiproques entre la France et la Russie ante´rieures au 9 mai 1945 (France–Russia), Journal Officiel de la Re´publique Française, 15 May 1998, 7378 Agreement between the Allied Government and the German Government, 30 August 1924, AJIL Supplement, 19 (1925), 42–48 Agreement on German External Debt 27 February 1953, HMSO (1953), Cmd 8781 (London Debt Agreement) Agreement between the Government of the People’s Republic of China and the Government of the United Kingdom of Great Britain and Northern Ireland Concerning the Settlement of Mutual Historical Property Claims, 5 June 1987, UKTS No. 37 (1987), Cm 198 Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Soviet Union concerning the Settlement of Mutual Financial and Property Claims arising before 1939 (UK–USSR), 15 July 1986, UKTS No. 65 (1986), Cm 30; 1666 (1992) UNTS No. 28650 Agreement between the Government of the United Mexican States and the Government of the Republic of India on the Promotion and Protections of Investments (India–Mexico), Investment Claims-Bilateral Treaties, 742 (2007)

245, 247

xlviii

39

149

76–80, 85, 148, 151, 152 200

197

244

table of treaties

Treaties

Pages

Agreement on Austrian and Hungarian Unsecured Public Debts Payable in Silver, Florins & Crowns, CFB, Annual Report 1931, 100–01 Agreement regarding the Complete and Final Settlement of the Question of Reparations (with Annexes), 20 January 1930, AJIL Supplement, 24 (1930), 259–348 Agreement between the Reparation Commission and the German Government signed in London, 9 August 1924, AJIL Supplement, 19 (1925), 24–36 Agreement between the United Kingdom and the Soviet Union concerning the Settlement of Mutual Financial and Property Claims (UK –USSR), 5 January 1968, 1981 Gr.Brit.T.S. No. 12, Cmnd 3517 Anglo-American Claims Convention (Britain–United States), 8 February 1853, 10 Stat. 988 Arbitration Agreement between the Imperial Russian Government and the Imperial Ottoman Government, 22 July/4 August 1910, AJIL Supplement, 7 (1913), 62–67 Arbitration Protocol between France and Peru, 2 February 1914, AJIL, 8 (1914), 240–42 Bacourt-Erra´zuriz Protocol, 23 July 1892 Bilateral Investment Treaty (Bahrain–US), 29 September 1999, S. Treaty Doc. No. 106–25 (2000) Bilateral Treaty of Friendship (France–Russia), October 1990 Claims Convention (New Granada–US), 10 September 1857, Treaties Concluded by the United States of America with Foreign Nations (Boston: Little Brown & Company, 1866), 359–63 Claims Settlement Convention (Colombia–US), 10 February 1864, 13 Stat. 685–87 Convention (France–Mexico), 10 April 1864, 54 BFSP 944 Convention concerning Customs Revenues (Dominican Republic–US) (‘Dominican Receivership Convention’), 8 February 1907, 35 Stat. 1880 Convention between Great Britain, Austria, Prussia, and Russia, and France, relative to the Claims of the Subjects of the Allied Powers upon France, 20 November 1815, 3 BFSP 1838 Convention establishing Mixed Commission (US–Venezuela), 5 December 1885, Moore, Arbitrations, 4810 Convention for the Protection of Human Rights and Fundamental Freedoms, 14 November 1950, Eur TS No. 5; 213 UNTS 221

134

xlix

76

140

197

135, 153 88, 91

138, 160 139 244 39 174

174–81 174 43

160

177 182–87, 302

l

table of treaties

Treaties

Pages

Convention for a Re-opening of the Claims of Citizens of the United States against Venezuela under the Treaty of April 25 (United States–Venezuela), 5 December 1885, Moore, Arbitrations 4810 Convention respecting the Limitation of the Employment of Force for the Recovery of Contract Debts, 18 October 1907, AJIL Supplement, 2 (1908), 81–84 Convention on the Settlement of Investment Disputes between States and Nationals of Other States, 18 March 1965, 4 ILM (1965), 524–44

267

Convention between the United States of America and the Republic of Mexico for the Adjustment of Claims, 4 July 1868, 15 Stat. 679 Declaration of the Government of the Democratic and Popular Republic of Algeria Concerning the Settlement of Claims by Government of the United States of America and the Government of the Islamic Republic of Iran, 19 January 1981, 20 ILM (1981), 230–33 Doyle Convention between Mexico and Great Britain, 4 December 1851, Parliamentary Papers, vol. LXIV (1862), Correspondence Related to the Affairs of Mexico, 195 Draft Convention on Responsibility of States for Damage Done in their Territory to the Person or Property of Foreigners, AJIL Special Supplement, 23 (1929), 133–241 Free Trade Agreement (Australia–US), 18 May 2004 General Arbitration Treaty between the United States of America and the French Republic (‘Taft Treaty’), 3 August 1911, AJIL Supplement, 5 (1911), 249–53 Hague Convention of 18 October 1907 for the Pacific Settlement of International Disputes, Treaties and Other International Agreements of the United States of America 1776–1949, vol. 1 (ed. C. I. Bevans) (Washington, DC: Government Printing Office, 1968) Innsbruck Protocol and Agreement as regards its Application, signed at Prague, 14 November 1925 (Austria, CzechoSlovakia, Hungary, Italy, Poland, Romania, and Yugoslavia), CFB Rep (1926), 82–89 Multilateral Agreement on Investment, Draft Consolidated Text, 22 April 1998

37, 38, 264

209–19, 226–38, 249, 251, 257, 263, 278, 299, 311, 312, 319, 321 175, 180, 283

188

174

264

247, 275 6

138

253

253

table of treaties

Treaties

Pages

New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 7 June 1959, 330 UNTS 3 North American Free Trade Agreement, 17 December 1992, 32 ILM (1993), 289–456 Olney–Pauncefote Treaty of Arbitration between the United States and Great Britain (not ratified), AJIL Supplement, 5 (1911), 88–93 Panama Canal Convention (Panama–US), 18 November 1903, 22 Stat. 2234 Payments Agreement (Czechoslovakia–UK), 18 August 1949, Treaty Series No. 52 (1949), Cmd 7781 Payments Agreement (Poland–UK), 2 March 1948, Treaty Series No. 12 (1948), Cmd 7352 The Peace Treaty of Brest-Litovsk (Germany, Austria-Hungary, Bulgaria, Turkey and the Russian Republic), 3 March 1918 The Platt Amendment, Treaties and Other International Agreements of the United States of America, 1776–1949, vol. 8 (ed. C. I. Bevans) (Washington, DC: United States Government Printing Office, 1971), 1116–17 Protocol between Germany and Venezuela relating to the Settlement of the German Claims, 13 February 1903 Protocol of St Petersburg of 1909 (Russia–Turkey), 3 March 1909 Reunification Treaty between the Federal Republic of Germany and the German Democratic Republic, 31 August 1990, BGBl. II, S. 889 Settlement of Pecuniary Claims against Yugoslavia Agreement (US–Yugoslavia), 19 July 1948, 62 Stat. 2658 Trade Agreement (UK–Russia), 16 March 1921, AJIL, 16 (1922), 141–47 Treaty of Amity, Commerce, and Navigation (Great Britain–US) (‘Jay Treaty’), 19 November 1794, Treaties and Other International Acts of the United States of America, vol. 2 (ed. H. Miller) (Washington, DC: Government Printing Office, 1931) Treaty of Berlin (Austria-Hungary, Germany, Great Britain, Italy, Russia, Turkey), 13 July 1878, 69 BFSP 749 Treaty on the Encouragement and Reciprocal Protection of Investments (Argentina–Germany), 9 April 1991, 1910 UNTS (2001), 171–224 Treaty concerning the Encouragement and Reciprocal Protection of Investment (Bahrain–United States), 29 September 2000), 39 ILM 252 Treaty regarding Finances, Economic Development and Tranquillity (Haiti–United States), 16 September 1915, 39 Stat. 1654; AJIL Supplement, 10 (1916), 234–38

154 244 5

158–59 200–01 196 197 55

31 91 132

189 197 157

91 245

244

43

li

lii

table of treaties

Treaties

Pages

Treaty of Paris (Great Britain–US), 30 September 1783, Treaties and Other International Acts of the United States of America, vol. 2 (ed. H. Miller) (Washington, DC: Government Printing Office, 1931) Treaty of Peace between the Allied and Associated Powers and Germany (‘Versailles Peace Treaty’), 28 July 1919, AJIL Supplement, 13 (1919), 151–386 Treaty of Peace (Japan–United States), 8 September 1941, 136 UNTS 45–164 Treaty of Peace with Italy, 10 February 1947, [1948] ATS 2 Treaty of Peace with Turkey (‘Lausanne Peace Treaty’), 24 July 1923, 28 LNTS 11; AJIL Supplement, 18 (1924), 1–109 Treaty concerning the Reciprocal Encouragement and Protection of Investment (Argentina–US), 14 November 1991, 31 ILM (1992), 124–37 Treaty for the Re-establishment of an Independent and Democratic Austria, 15 May 1955, AJIL Supplement, 49 (1955), 162–93 Treaty between the United States of America and the Republic of Uruguay concerning the Encouragement and Reciprocal Protection of Investment (Uruguay–US), 25 October 2004, 44 ILM (2005), 268–98 Tripartite Claims Commission (United States, Austria and Hungary), Administrative Decision No. 1, Announcing Definitions and General Governing Principles and Dealing with the Function and Jurisdiction of the Commission, 25 May 1927, AJIL, 21 (1927), 599–609 Tripartite Claims Commission (United States, Austria and Hungary), Administrative Decision No. 2, Dealing with Debts and Claims Arising under the Economic Clauses of the Treaties, 25 May 1927, AJIL, 21 (1927), 610–27 ¨ sterreich und der Vertrag zwischen der Republik O Bundesrepublik Deutschland zur Regelung vermo ¨gensrechtlicher Beziehungen (Austria–Germany) (‘Property Treaty’), 15 June 1987, BGBl. No. 119/1958, 26 June 1958 Vienna Convention on the Law of Treaties, concluded 23 May 1969, entered into force 27 January 1980, 1155 UNTS (1969), 331–47 Vienna Convention on Succession of States in respect of State Property Archives and Debts, concluded 17 April 1983, 22 ILM (1983), 306–29 (not yet in force)

7

75, 90, 112–13, 143, 148–50 81 190 129–32 98

235

59

59

23

79, 131, 216, 231–32 12, 131

Abbreviations

AER P&P AER AFPER AJCL AJIL All ER ARIEL ASIL Proc AuYBIL BFSP BIT BYBIL CAC CDS CFB CFB Rep Chicago LR CJIL CJTL Col. LR ECHR, Ser. A EPIL

American Economic Review Papers and Proceedings American Economic Review Association Française des Porteurs d’Emprunts Russes American Journal of Comparative Law American Journal of International Law All England Law Reports Austrian Review of International and European Law American Society of International Law Proceedings Australian Yearbook of International Law British and Foreign State Papers bilateral investment treaty British Yearbook of International Law collective action clauses credit default swap Corporation of Foreign Bondholders Council of the Corporation of Foreign Bondholders, Annual Report University of Chicago Law Review Chicago Journal of International Law Columbia Journal of Transnational Law Columbia Law Review European Court of Human Rights, Series A (Judgments and Decisions) Encyclopedia of Public International Law, 2nd edn (Elsevier) liii

liv

list of abbreviations

FBPC FCC FCSC FCSC D&A

Foreign Bondholder Protective Council British Foreign Compensation Commission US Foreign Claims Settlement Commission US Foreign Claims Settlement Commission: Decisions and Annotations (1968) FDC Combined Annual Reports of the World War Foreign Debt Commission with Additional Information regarding Foreign Debts Due the United States (Washington, DC: Government Printing Office, 1927) FRUS Foreign Relations of the United States GCAB Global Committee of Argentine Bondholders Georgia JICL Georgia Journal of International and Comparative Law GJIL Georgetown Journal of International Law HILJ Harvard International Law Journal HIPC Heavily Indebted Poor Countries Initiative Hornby, Private E. Hornby, Report of the Proceedings of the Mixed Claims Commission on Private Claims (1856) IBRD International Bank for Reconstruction and Development ICJ Rep International Court of Justice, Judgments, Advisory Opinions and Orders ICJ Pleadings International Court of Justice, Pleadings, Oral Arguments, Documents ICLQ International and Comparative Law Quarterly ICSID History ICSID, History of the Convention (1968), 4 vols. ICSID Rep Reports of Cases Decided under the ICSID Convention ICSID Rev ICSID Review – Foreign Investment Law Journal IFLR International Financial Law Review ILC International Law Commission ILDC International Law in Domestic Courts, Oxford University Press Database ILR International Law Reports ILM International Legal Materials IMF International Monetary Fund IMF Working Paper International Monetary Fund Working Paper Iran–US CTR Iran–US Claims Tribunals Reports ISDA International Swaps and Derivatives Association


IYBIL Jackson, Law and Procedure JDI JEH J Int’l Arb JPE JWI JZ LDA LGDJ Mealey’s Moore, Arbitrations MPEPIL NYLJ PCA PCIJ, Series A PCIJ, Series A/B PCIJ, Series B Ralston, Law and Procedure RCDIP RDILC Recueil arbitrages Recueil des cours REDI RGDIP RIW Schreuer, Commentary I

Italian Yearbook of International Law R. Jackson, The Law and Procedure of International Tribunals (1926) Journal du droit international (Clunet) Journal of Economic History Journal of International Arbitration Journal of Political Economy Journal of World Investment and Trade Juristenzeitung London Debt Agreement Librairie geńe´rale de droit et de jurisprudence Mealey’s International Arbitration Report J. B. Moore, History and Digest of the International Arbitrations (1898) Max Planck Encyclopedia of Public International Law, 3rd edn (2006), www.mpepil.com New York Law Journal Permanent Court of Arbitration Permanent Court of International Justice, Collection of Judgments Permanent Court of International Justice, Judgments Permanent Court of International Justice, Collection of Advisory Opinions J. H. Ralston, The Law and Procedure of International Tribunals (1926) Revue critique de droit international prive´ Revue de droit international et de le´gislation compareé A. G. de Lapradelle and N. Politis, Recueil des arbitrages internationaux (1905–54) Recueil des cours de l’Acade´mie de Droit International ˜ ola de derecho internacional Revista espan Revue geńe´rale de droit international public Recht der internationalen Wirtschaft Christoph Schreuer, The ICSID Convention: A Commentary, 1st edn (2001)

lv

lvi


Schreuer, Commentary II SDNY UNCITRAL UNRIAA UNTS USFR YBILC Ybk Comm Arb Zao ¨RV

Christoph Schreuer et al., The ICSID Convention: A Commentary, 2nd edn (2009) District Court for the Southern District of New York United Nations Commissions on International Trade Law Reports of International Arbitral Awards (United Nations) United Nations Treaty Series United States Foreign Relations Yearbook of the International Law Commission Yearbook of Commercial Arbitration ¨ r ausla Zeitschrift fu ¨ndisches o ¨ffentliches Recht und Vo ¨lkerrecht

Part I Sovereign defaults across time

1

Sovereign debt crises and defaults

In the 1840s, Pennsylvania, seven Southern US states and the Territory of Florida defaulted on their debts.1 Pennsylvania failed to pay following a deep economic crisis and the insolvency of the United States Bank of Pennsylvania in 1837, then the largest bank in the United States.2 American creditworthiness abroad ‘sustained a heavy blow’.3 A proposed loan in Europe to the federal government came to naught, because of widespread distrust among European investors.4 Two further default waves in 1857 and 1870 cemented the European view that US states were untrustworthy debtors. Between 1840 and 1870 fifteen US states defaulted on their debt, including Virginia, New York and Maryland.5 Half of all US state debt was in default, and 10 per cent was repudiated outright.6 In many cases, states challenged the validity and constitutionality of their debts when sued by creditors, but with only limited success. Courts generally upheld these state debts, though creditors found it difficult to enforce their judgments.7

1

2

3 4

5 6

7

D. W. Howe, What Hath God Wrought: The Transformation of America, 1815–1848 (Oxford University Press, 2007), 508; R. Sylla and J. J. Wallis, ‘The anatomy of sovereign debt crises: lessons from the American state defaults of the 1840s’, Japan and the World Economy, 10 (1998), 267–98. D. Weber, ‘The Spanish-Mexican Rim’, in C. Milner et al. (eds.), Oxford History of the American West (Oxford University Press, 1944), 73. Ibid. B. C. Randolph, ‘Foreign bondholders and the repudiated debts of the Southern States’, AJIL, 25 (1931), 63–82, 75; CFB Rep (1931), 14. Ibid., 64. R. C. McGrane, Foreign Bondholders and American State Debts (New York: Macmillan, 1935), 21; W. B. English, ‘When America defaulted: American state debt in the 1840s’, unpublished manuscript, University of Pennsylvania (1991). E.g. Mississippi v Johnson; Citizens Bank of Louisiana v Funding Board.

3

4

sovereign defaults

The Southern repudiations were a major obstacle for the Confederacy’s fund-raising efforts in Europe, especially in London. Belmont, the Union’s financial emissary in London, attempted to dissuade the Rothschilds from advancing any funds to the South. He drew the attention of London bankers to the Southern repudiations in the 1840s: ‘Who will take a dollar of a Confederacy of States of which four have already repudiated their debt . . . unless it be that the name of Jefferson Davis, notwithstanding his advocacy of repudiation in his own State of Mississippi, should have a sweeter sound to European capitalists than I think.’8 The federal government refused any bailout or assumption of state debt. William Wordsworth, whose family suffered heavy losses on Pennsylvania and Mississippi bonds,9 gave timeless expression to the feelings of many European holders of US state debt: ‘high repute, with bounteous Nature’s aid,/Won confidence, now ruthlessly betrayed’.10 These defaults, which are comparable to those of independent states, left a bad aftertaste among many European purchasers of US state bonds. As one commentator noted: ‘The repudiation of state debts in the early 1840s had a totally shattering effect on European markets for US state and municipal securities.’11 When economic conditions improved, most states that had defaulted resumed the payment of interest. Michigan, Florida, Mississippi and Arkansas, however, repudiated parts of their debt. One of America’s great cultural institutions, the endowment for the Smithsonian Institution, suffered large losses on Arkansas bonds.12 It took decades for the repudiating states’ reputation to recover. 8

9

10

11

12

J. Sexton, Debtor Diplomacy: Finance and American Foreign Relations in the Civil War Era, 1837–1873 (Clarendon: Oxford, 2005). B. C. Randolph, ‘Foreign bondholders’, 63; McGrane, Foreign Bondholders and American State Debts, 194–203; B. Rowland, ‘William Wordsworth and Mississippi Bonds’, Journal of Southern History, 1 (1935), 501–07. W. Wordsworth, ‘To the Pennsylvanians’ (1845), in Poetical Works (Oxford University Press, 1947), vol. 4, 132; Letter from Wordsworth to a Mississippi legislator, 23 March 1843, quoted from CFB, Annual Report 1930 (referring to Mississipi’s repudation for ‘shameless dishonesty’ and how it led even ‘the most sanguine . . . to fits of despondency’). D. C. S. M. Platt, Foreign Finance in Continental Europe and the United States, 1815–1870: Quantities, Origins, Functions and Distribution (Allen & Unwin: London, 1984), 162; C. Kobrak, Banking on Global Markets: Deutsche Bank and the United States, 1870 to the Present (Cambridge University Press, 2008), 30 (US financial relations with the rest of the world after the Civil War reached a ‘low ebb’). The Banker’s Magazine and Statistical Register, vol. XII (New York: J. Smith Homans, 1857–58), 671; Arkansas Public Documents: 1854–60, Message of Elias N. Conway, Governor of Arkansas to Both Houses of the General Assembly, 7 November 1854 (Little Rock: True Democrat Office), 10.

sovereign debt crises and defaults

5

Notwithstanding, eight states never settled their debts in full with their creditors.13 The default of some US states is one of the rare cases where the Corporation of Foreign Bondholders failed to obtain a settlement.14

A. US state defaults and arbitration For decades, concerns that foreign bondholders might submit unpaid state bonds to international arbitration tempered the US enthusiasm for treaties on the peaceful settlement of disputes in the United States, especially among Southern politicians.15 US Secretary of State Hay attributed the Senate’s reluctance to ratify such treaties to fears that arbitration would be sought on the question of Southern repudiated debts.16 A particular fear was that British bondholders might find a receptive forum to bring their claims. When the Senate considered ratification of the Olney–Pauncefote general arbitration treaty with Great Britain (1897), it included an amendment at the behest of Senator Bacon of Georgia that explicitly ruled out any claim against any state of the Union: ‘but no difference shall be submitted under this Treaty which, in the judgment of either Power, materially affects its honor, . . . nor shall any claim against any State of the United States, alleged to be due to the Government of Great Britain, or to any subject thereof, be a subject matter of arbitration under this Treaty.’17 The US Senate declined to ratify the treaty in 1897. Similarly, when the Senate debated the Roosevelt treaties in 1904–05, the issue of state debt received much attention, to Roosevelt’s chagrin.18

13

14

15 16 17

18

W. A. Scott, The Repudiation of State Debts (New York, Boston: T. Y. Crowell, 1893); C. P. Howland, ‘Our repudiated state debts’, Foreign Affairs, 6 (1928), 395–407; B. R. Curtis, ‘Debts of the states’, North American Review, 58 (1844), 109–57 provides a nuanced account of the causes. G. A. Sessions, Prophesying upon the Bones: J. Reuben Clark and the Foreign Debt Crisis, 1933–39 (Urbana: University of Illinois Press, 1992), 20. And see ch. 6.A below. Randolph, ‘Foreign bondholders’, 76. CFB Rep (1930), 42. Sen. Doc. 161, 58th Congress. 3d Session, 26–27 (emphasis added). See M. Blake Nelson, ‘The Olney–Pauncefote Treaty of 1897’, The American Historical Review, 50 (1945), 228–43, 237 (discussing additional reasons why the treaty failed to win ratification). Randolph, ‘Foreign bondholders’, 76; ‘Senate mustn’t alter arbitration treaties’, New York Times, 12 January 1905 (no danger that question of state debts will be arbitrated). In 1904–05, Roosevelt submitted to the Senate twenty-two arbitration treaties providing for arbitration by the Permanent Court of Arbitration.

6

sovereign defaults

Bondholders do not seem to have submitted any claims to the AngloAmerican Pecuniary Claims Commission of 1910.19 The agreement to arbitrate excluded all claims that were not specifically referred to arbitration in schedules of claims, unless preserved by either Party for further examination. This approach departed from the usual practice of providing for general arbitration.20 The reason for limiting arbitration to scheduled claims may have been the hundreds of claims that had been brought to the attention of the respective foreign offices with ‘little or no sufficient merit’, including many bonds claims.21 The Schedule of Claims to be submitted included a fourth class based on claims arising out of contracts, and the terms of submission were considerably more restrictive than for the property classes of claims that were submitted to arbitration. When the Taft Treaty with Great Britain (1911), the first in a series of ambitious general arbitration treaties, came up for ratification in the Senate, Senator Bacon of Georgia secured another carve-out for state debt. The reservation related to ‘questions affecting State indebtedness’, and provided that ‘the Treaty does not authorize the submission to arbitration of any question concerning the question of the alleged indebtedness or monied obligations of any State of the United States’.22 Senator Lodge opposed allowing any international adjudication of state debts.23 President Taft withdrew the treaty in response. In light of the approach taken by the US government in respect of the international adjudication of US states’ debts in the nineteenth century, the Soviet government deplored double standards and noted that the political arguments raised in the UK to exercise caution with respect to US state debts applied equally to Tsarist debt.24 The Corporation of Foreign Bondholders lamented that the US government ‘seems to vary its attitude according to whether a dispute lies between its own nationals and a foreign State or between foreign nationals and its own States. It is alone in the world to adhere in theory and practice to the amazing thesis that its own subsidiary . . . “sovereign states” can find sanctuary from just debts behind a national aegis.’25 19

20 22 23

Editorial Comments, ‘The American and British pecuniary claims arbitration’, AJIL, 7 (1913), 575–80. Text of the arbitration agreement, signed at Washington, 18 August 1910, AJIL, 5 (1911), 257. 21 Ibid., 1035. Ibid. Sen. Doc. 98, 62d Cong. 2d Sess; CFB Rep (1930), 397. 24 25 Sen. Doc. 353, 62d Cong. 2d Sess. CFB Rep (1930), 45, 398. Ibid., 48.


7

The only defeat for the opponents of state debts ever reaching an international arbitral tribunal or mixed commission came during the debate for the Bryan Treaties (1914), when an amendment reserving state debts failed to pass.26 The British government showed no strong inclination to press the bondholder claims diplomatically vis-a`-vis the United States. In 1930, the debts of seven US states remained in default.27 The Eleventh Amendment to the US Constitution (1794) precludes suits by foreign bondholders against US states.28 State sovereign immunity erected an almost insurmountable barrier for bondholders in national courts. Cuba sought redress on defaulted state bonds before the US Supreme Court, but quickly withdrew the suit.29 In the interwar period, Monaco was assigned state bonds by private parties, and brought a claim in the US Supreme Court.30 Yet it failed on the ground that such suit required North Carolina’s consent. For decades, debates raged about whether the federal government should assume defaulted state debts.31 After winning the revolutionary war against Britain in 1783, the US federal government had assumed about $21 million ($1.6 trillion, $0.5 billion) in debt of the thirteen states.32 Back then, the assumption of debt, incurred in a common war of independence, was a way to bring the young nation closer together. In the nineteenth century, by contrast, the fiscal independence of the states won the day. The US experience in the nineteenth and early twentieth centuries points to broader lessons about arbitration and sovereign debt. For one, virtually all states in the world have encountered, at some point in their history, serious payment difficulties and defaults (see Figure 1 below). Secondly, states show a great reluctance to commit to independent adjudication of disputes arising out of sovereign debt, not just for reasons of sovereignty, but also because the volume of borrowing potentially involved is so large. For borrowing countries, the implications of arbitration could be dramatic.

26 27 28

29 31

Randolph, ‘Foreign bondholders’, 76. H. Feis, Europe the World’s Banker, 1870–1914 (Yale University Press, 1931), 105. W. L. Raymond, ‘Savings bank loans and repudiations of state debt’, Barron’s, 9 February 1931 (the 11th Amendment ‘shelters repudiating states of the Union from prosecution by their creditors’). 30 Cuba v North Carolina. Principality of Monaco v Mississippi. 32 Sen. Doc. 153, 26th Congress 1st Sess (1840). Randolph, ‘Foreign bondholders’, 78.

8

sovereign defaults

B. Sovereign defaults as a perennial feature of sovereign lending Public credit achieved for the power of the state a revolution similar to the one caused by gunpowder.33 Wars and the attendant need for large-scale public borrowing catalysed the rise of the modern state, an institution which is unthinkable without the power to borrow and tax. As Charles Tilly writes, ‘preparation for war, paying for it, and mending its damage preoccupied rulers’ from the 1500s till modern times ‘. . . From the late seventeenth century onwards, budgets, debts and taxes arose to the rhythm of war.’34 Ever since the birth of the modern fiscal and borrowing state in the seventeenth century,35 disputes on the non-payment of sovereign debt have been common. States most commonly resolved these disputes through negotiation at the interstate level,36 and occasionally the use of force to compel repayment.37 The sovereign debt disputes that appear before international courts and tribunals are just the tip of the iceberg. Much negotiation was out of the public view. Arbitration had been a frequent tool used to settle defaulted sovereign debt, and reached its heyday before World War I.38 With the advent of restricted sovereign immunity in the 1960s and the widespread use of private loan agreements for sovereign borrowing, the locus of sovereign debt disputes shifted decisively to national courts. When a country defaults, creditors pursue various strategies – diplomatic, legal and market pressure – to obtain repayment. Historically, a prominent method to enforce a debt claim against a sovereign has 33

34 35 36

37

38

Jean Baptiste Say, A Treatise on Political Economy, 6th US edn (Philadelphia: Claxton, Remsen & Haffelfinger, 1834), 480 (‘The faculty of borrowing is a more powerful agent than even gunpowder, but probably the gross abuse that is made will soon destroy its efficacity’). C. Tilly, Coercion, Capital, and European States AD 990–1990 (Oxford: Blackwell, 1990), 74–75. R. Bonney, The Rise of the Fiscal State in Europe, c. 1200–1815 (Oxford University Press, 1999). M. Waibel, ‘The diplomatic channel’, in J. Crawford, A. Pellet and S. Olleson (eds.), The Law of International Responsibility (Oxford University Press, 2010). M. Finnemore, ‘The case of sovereign default and military intervention’, in The Purpose of Intervention: Changing Beliefs about the Use of Force (Ithaca: Cornell University Press, 2003); J. Latane´, ‘Forcible collection of international debts’, The Atlantic Monthly (1906), 542–50. H. A. Moulin, ‘La Doctrine de Drago’, RDGIP, 14 (1907), 417–72, 458 (‘le contentieux des ´tats est essentiellement du domaine de l’arbitrage’); I. Soares Micali, emprunts d’E ‘Aspects juridiques de l’endettement international: l’expe´rience du Bre´sil’, Doctoral Thesis (University of Paris I, Pantheón Sorbonne, 1993), 383, assesses the suitability of arbitrating sovereign debt disputes, and cites the favourable experience with arbitration clauses in Brazil’s debt restructuring agreements in the 1980s.


9

60

Percent of countries

50

40

30

20

10

0 1800 1810 1820 1830 1840 1850 1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Year

Figure 1 Sovereign external debt: 1800–2006. Percent of countries in default or restructuring. Source: Reinhardt and Rogoff (2008).

been to bring a claim before an international court and tribunal. The question of how to resolve the tension between a country’s limited payment capacity and creditor claims has repeatedly arisen in international adjudication, and is likely to arise in future cases. Sovereign defaults have been a perennial feature of sovereign lending.39 Their incidence is high, though the causes vary.40 The high frequency of sovereign defaults is striking given the small number of states before 1918. Sovereign defaults often cluster in time, due to economic linkages among countries and the dependence on world economic conditions, such as commodity prices and interest rates. Periodic sovereign debt crises not only decrease welfare for countries 39

40

A. Smith, An Enquiry into the Nature and Causes of the Wealth of Nations (1776) (New York: Knopf, 1991), 563 (‘Almost all states, however, ancient, as well as modern, when reduced to this necessity, have, upon some occasion, played this very juggling trick [of an undeclared national bankruptcy]’); E. Borchard, State Insolvency and Foreign Bondholders: Vol.1, General Principles (Yale University Press, 1951); M. Winkler, Foreign Bonds, an Autopsy: A Study of Defaults and Repudiations of Government Obligations (Philadelphia: Swain, 1933); F. Sturzenegger and J. Zettelmeyer, Debt Defaults and Lessons from a Decade of Crises (Cambridge, MA: MIT Press, 2007), 3–30, survey the last two decades. K. Rogoff and C. Reinhart, ‘Serial default and the “paradox” of rich to poor capital flows’, AER P&P (2004), 53–58, find 125 defaults for a sample of 23 countries over the last five centuries; A. G. Haldane, Fixing Financial Crises in the Twenty-First Century (London: Routledge, 2004), documents about 200 defaults since 1830.

10

sovereign defaults

and their population. They also threaten political and financial stability, both regionally and globally. In the 1820s, for example, sovereign bond issuances by Latin American countries surged.41 But economic and political instability in the young Latin American nations was the order of the day. Countries also borrowed to maintain internal order and to buy weaponry, rather than for infrastructure investment as stated in bonds’ prospectuses.42 The upper and middle echelons of rapidly industrialising European societies were eager for the high yields promised by the bonds. Financial fraud has always been the dark underbelly of financial globalisation and sovereign borrowing. In 1822, the newly independent Latin American state of Poyais issued a bond in London, with handsome commissions for the arranging bankers. Poyais, according to the bond prospectus, was a bountiful land with great riches on the Bay of Honduras.43 But Poyais was a fictitious country, and the bond a scheme to defraud gullible investors of their money.44 Borchard noted that the ‘English investor, like his American counterpart, was inexperienced, eager for high yields and in a feverishly speculative temper’.45 Taken together, these factors were a recipe for disaster. After just two years, a wave of sovereign defaults rattled financial markets, and over 90 per cent of Latin American bonds were in default. It took more than four decades to clean up the Latin American defaults in settlements.46 A major House of Commons investigation in 1875 revealed that overborrowing by states in the nineteenth century was common. The funds received were often misused, financial intermediaries charged 41

42 43 44

45

46

S. Dawson, The First Latin American Debt Crisis: The City of London and the 1822–25 Loan Bubble (Yale University Press, 1990) captures this episode best. L Bethell, The Cambridge History of Latin America (Cambridge University Press, 2009), 153. Dawson, Latin American Debt Crisis, 41. D. C. M. Platt, ‘British bondholders in nineteenth-Century Latin America: injury and remedy’, Inter-American Economic Affairs, 14 (1960), 3–43 has further examples of fraudulent lending schemes. Borchard, State Insolvency and Foreign Bondholders, xx. Cf also C. Marichal, A Century of Debt Crises in Latin America: from Independence to the Great Depression, 1820–1930 (Princeton University Press, 1989), 81 (strong demand for bonds with high yield, lax regulation and the fact that financial intermediaries did not share in the risk meant that ‘the issue of external bonds was as easy as printing money’); D. S. Landes, Bankers and Pashas: International Finance and Economic Imperialism in Egypt (Harvard University Press, 1979), 106 (‘for Egypt in the second half of the nineteenth century, the only limit on the issue of such bonds was the confidence of the public’). Bethell, Cambridge History, 153 (‘a legacy of diplomatic complications’).


11

enormous fees (up to 25 per cent of the borrowing proceeds), sometimes paying commissions to representatives of the issuer and engaging in serious misrepresentations to investors who bought such securities in great numbers, especially on the London market.47 Similarly, a Senate committee offered the following diagnosis of the havoc in the sovereign debt market at the height of the Great Depression: The records of the activities of investment bankers in the flotation of foreign securities is one of the most scandalous chapters in the history of American investment banking. The sale of these foreign issues was characterized by practices and abuses which were violative of the most elementary principles of business ethics.48

The financial intermediaries ought to have paid much greater attention to the creditworthiness, or absence thereof, of individual issuers. Moreover, they ‘generally indulged in practices of doubtful propriety in the promotion of foreign loans and in the sale of foreign securities to the American public’. A Bavarian village wanted to borrow $125,000, but ended up borrowing $3 million instead after repeated persuasion by the lender.49

C. Sovereign debt Sovereign bonds are at the heart of public finance and play a central role in the development of capital markets. To developed and developing countries alike, bonds have long been the instrument of choice for raising long-term funds, domestically and internationally. The history of sovereign bonds in the Americas and Europe spans almost 200 years, despite periodic ups-and-downs.50

47

48

49

50

House of Commons, Reports on Loans to Foreign States (1975); J. F. Rippy, ‘A bond-selling extravaganza of the 1920s’, Journal of Business of the University of Chicago, 23 (1950), 238–47. Senate Committee on Banking and Currency, Report of the Committee on Banking and Currency on Stock Exchange Practices, S. Rept. 1455, 73rd Congress 2d. sess. 1934, 125. C. Lewis and K. T. Schlotterbeck, America’s Stake in International Investments (Washington, DC: Brookings Institution, 1938), 377. Dawson, Latin American Debt Crisis; House of Commons, Report from the Select Committee on Loans to Foreign States; together with the Proceedings of the Committee, Minutes of Evidence, Appendix, and Index (London: Her Majesty’s Stationery Office, 1875); N. Ferguson, The Cash Nexus: Money and Power in the Modern World, 1700–2000 (New York: Basic Books, 2001).

12

sovereign defaults

Sovereign bonds and bank debt are the two most important categories of sovereign debt. The stock of total debt securities (public and private) amounted to $23.4 trillion at the end of 2009.51 States owed more than half, or more than $13 trillion. Commercial banks had claims of at least $3 trillion against sovereigns and total foreign claims of $31 trillion.52 The size of the international sovereign debt market exceeds four times US GDP or roughly four-fifths of global economic output. In 2009, real US GDP was $13 trillion.53 The implied average debt/GDP ratio across countries is about 50 per cent. On the one hand, the appeal of sovereign bonds to purchasers tends to suffer after debt crises, with defaults and restructurings in recent memory. Demand by potential bondholders may be subdued for a while. On the other hand, sovereign borrowers are widely seen as benchmark issuers that are presumed to be safer than any private borrower. International law on sovereign debt is underdeveloped and knows no settled definition of sovereign debt. Article 33 of the Vienna Convention on Succession of States in Respect of State Property, Archives and Debt, which has not entered into force due to an insufficient number of ratifications, defines state debts (sovereign debt) as ‘any financial obligation of a predecessor State arising in conformity with international law towards another State, an international organization or any other subject of international law’.54 This definition has not found general acceptance. As a rule, the Convention provides for the successor state to succeed into sovereign debt, with an equitable reduction for any territory lost.55 For several reasons, this definition is unsatisfactory. First, being based on the restriction to ‘another State, an international organization or any other subject of international law’, it appears to exclude all debt owed to private creditors – the most important type of debt in volume terms. It places the two types of debt on a different footing. Second, even if 51

52

53

54

55

International Monetary Fund, Coordinated Portfolio Investment Survey 2009, Table 8.2, www.imf.org/external/np/sta/pi/08/Table09_2.xls. Derivatives are not included in these figures. Bank for International Settlements Consolidated Banking Statistics, Sept. 2010, Statistical Annex, Table 9A www.bis.org/statistics/consstats.htm. The United States’ share of world GDP is about 20 per cent (at ppp). US Bureau of Economic Analysis, National Accounts, http://www.bea.gov/national/xls/gdplev.xls. Vienna Convention on Succession of States in Respect of State Property, Archives and Debts. T.-H. Cheng, State Succession and Commercial Obligations (Ardsley: Transnational Publishers, 2006).


13

private creditors were ‘other subjects of international law’ the qualification ‘in conformity with international law’ is of doubtful practical value, since it says nothing about the predominant type of debt.56 With few exceptions, today’s sovereign debt instruments are governed by municipal law. Ordinarily, sovereign debt is divided into internal and external debt, though the boundary between the two is becoming increasingly blurred. External debt is expressed in foreign currency, typically payable abroad, governed by some external law and subject to the jurisdiction of external courts. Important categories of external debt are: (i) debt owed to supranationals, (ii) official debt, (iii) commercial bank debt, (iv) bond debt and (v) trade debt.57 Sovereign bonds are debt instruments issued by a state and acknowledging indebtedness and promising repayment of principal and interest on an earlier advance of money.58 In this sense, they are highly asymmetric. Historically, a bond is a ‘document written and sealed containing a confession of debt’.59 Black’s Law Dictionary defines a bond as a ‘long-term, interest-bearing debt instrument issued by a corporation or governmental entity, usually to provide for some particular financial need’. Philip Wood defines ‘bonds’ as ‘negotiable debt securities’ where the underlying ‘transaction is loan, but the terms of loan are set out in securities’.60 Borchard defines a sovereign bond as the ‘principal document containing the terms of the contractual relationship between the debtor government and the individual lender . . . issued by the bank in accordance with the loan agreement or directly by the government pursuant to the loan prospectus. It evidences the promise by the borrower to pay the agreed interest on the loan, the principal at maturity, and to amortize the issue in a specified manner.’61 Debentures, promissory notes and certificates of indebtedness display similar features. The word debenture derives from the word ‘debentur’, 56

57 58

59

60

61

Cf. ‘ILC Report on the Draft Articles on succession of states in respect of state property, archives and debts’, A/Conf.117/4, 79, reprinted in YBILC, vol. 2, part 2 (1981). ILA Study Group on Sovereign Insolvency, ‘The state of sovereign insolvency’ (2010), 4–5. Cf. L. Jones and R. Bowers, The Law of Bonds and Bond Securities (Indianapolis: Bobbs-Merrill, 1935), 4. F. Pollock and F. W. Maitland, The History of English Law before the Time of Edward I (Cambridge University Press, 1898), 207. P. Wood, International Loans, Bonds, and Securities Regulation (London: Sweet and Maxwell, 1995), 9. Borchard, State Insolvency and Foreign Bondholders, 23.

14

sovereign defaults

originally the first word of a deed detailing sums acknowledged to be owed. Notes typically have shorter maturities than bonds.

D. Sovereign debt restructurings Countries with ‘unsustainable’ debt burdens routinely restructure their public debt. The term ‘sovereign debt restructuring’ refers to any ‘changes in the originally envisaged payments, either after a default or under the threat of default’.62 Their aim is a more manageable liability profile over time or a reduction in the debt’s net present value. As private debt became more prominent, exchange offers have become the primary means of dealing with unsustainable sovereign debt over the last two decades. Prior or after default, the borrowing country sets out a detailed proposal to its creditors, with reference to its financial circumstances, to exchange old bonds for new ones that are more closely aligned with the country’s ability to pay.63 Exchange offers are typically in take-it-or-leave-it form.64 Unlike companies, which are able to reorganise in the shadow of corporate insolvency law, such exchanges are presently among the few viable methods for reorganising sovereign debt. Sovereign bankruptcy proposals have had currency for over two hundred years.65 Other proposals hoped to strengthen the enforcement possibilities against defaulting countries.66 In 2001, the IMF put forward a sovereign debt restructuring mechanism (SDRM).67 At its best, the SDRM would achieve ‘what the diplomats, gunboat captains, administrators, and judges of the last two hundred years failed to achieve: an effective method by which the official sector could encourage orderly workouts of private 62 63

64

65

66

67

Sturzenegger and Zettelmeyer, Debt Defaults, 3, define debt restructurings. L. C. Buchheit, ‘Exchanging places’, IFLR, 10 (1991) and L. C. Buchheit and M. Gulati, ‘Exit consents in sovereign bond exchanges’, UCLA Law Review, 48 (2000) 59. L. Rieffel, Restructuring Sovereign Debt: The Case for Ad Hoc Machinery (Washington, DC: Brookings Institution Press, 2003), 193–205; R. Olivares-Caminal, Legal Aspects of Sovereign Debt Restructuring (London: Sweet & Maxwell 2010), chs. 4 and 6, has details on Ukraine’s and Ecuador’s exchange offers. G. Diena, Il fallimento degli stati e il diritto internazionale (Turin: Unione Tipografico, 1898) is an early noteworthy contribution; K. Rogoff and J. Zettelmeyer, ‘Bankruptcy procedures for sovereigns: a history of ideas, 1976–2001’, IMF Staff Papers, 49 (2002), 470–507, survey a wide range of proposals; J. A. Ka¨mmerer, ‘State Bankruptcy’, in MPEPIL (2009). A. Neymarck, Finances contemporaines, Vol. III: questions économiques et financie`res 1872–1904 (Paris: Guillaumin et Cie, 1905), 138. A. Krueger, A New Approach to Sovereign Debt Restructuring (Washington, DC: International Monetary Fund, 2002).


15

sector claims without shouldering the full moral, political, and financial responsibility for these workouts’.68 However, the SDRM proposal was plagued by several contradictions and failed to garner sufficient political support. It was both too bold and yet not ambitious enough. It failed to assuage creditor concerns that their protection required substantial strengthening. Criticisms included the double role of the IMF as a creditor and adjudicator, the potential impact on the cost of sovereign financing, the intervention in contractual rights, the move towards rules even though each sovereign insolvency has unique features that call for ad hoc solutions, and the desire to maintain room for governments to influence the terms of restructurings.69 To facilitate future sovereign debt restructurings, the international community advocated the inclusion of collective action clauses (CACs) in sovereign bonds in the early 2000s. The purpose of these CACs is to alleviate the collective action problems that arise when a country has numerous dispersed creditors with divergent interests and attempts to restructure its debts. The IMF originally favoured the SDRM to deal with unsustainable debt burdens.70 The SDRM was shelved after strong opposition by financial markets and some borrowing countries. Following concerns about the debt sustainability of some countries in the Eurozone in 2010, the idea of a permanent debt restructuring mechanism to replace the European Financial Stability Facility that will expire in 2013 gained ground. Eurozone governments also decided to include CACs in their sovereign bonds.71

Argentina’s default and restructuring Argentina’s default in 2001 was the largest and most complex sovereign default in history.72 The restructuring involved several hundred

68

69 70

71

72

L. Buchheit, ‘The role of the official sector in sovereign debt workouts’, Chicago Journal of International Law, 6 (2005), 342. ILA, The State of Sovereign Insolvency (2010), 30. G-10, ‘The resolution of sovereign liquidity crises: a report to the Ministers and Governors prepared under the auspices of the Deputies’ (1996); Report of the G10 Working Group on Contractual Clauses (2002). F. Gianviti et al., A European Mechanism for Sovereign Debt Crisis Resolution: A Proposal (Brussels: Bruegel, 2010). It shares that distinction with the restructuring of the German Reich’s external liabilities in 1953. The leading account is in H. Abs, Entscheidungen: 1949–1953: die Entstehung des Londoner Schuldenabkommens (Mainz: Hase & Koehler, 1991).

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sovereign defaults

thousand creditors and more than 140 sovereign bonds, denominated in six currencies and governed by eight different municipal laws. Argentina defaulted on more than $120 billion in private debt, and had to reschedule official bilateral and multilateral debt in excess of $30 billion. The economic and social consequences of the default were dramatic. In the quarter of the default, national output contracted by 16.3 per cent.73 Unemployment and poverty rose sharply.74 Demonstrations and crime were common. The depth of the crisis was comparable to the Great Depression in the United States. It is against this background of rising social and political tensions that Argentina’s government negotiated with external creditors. The comprehensive debt restructuring in 2005 was preceded by a voluntary ‘mega swap’ in 2001, a domestic restructuring in November 2001 and the March 2002 conversion of all dollar liabilities into pesos. Nestor Kirchner was elected president in May 2003. A few months later, the government fired the opening shot in its negotiations with creditors. In May 2003, Argentina proposed to write off 80 per cent of creditor claims. Most creditors reacted with outrage to this proposal of writing down four-fifths of their claims and commenced dozens of lawsuits in European and US courts.75 Yet the government succeeded in anchoring the ultimate restructuring around a deep haircut, and shifted the bargaining range for its sovereign debt restructuring in its favour. Creditors prepared to battle with the government. They formed a series of groups to coordinate their actions, share information and increase transparency with respect to Argentina’s public finances and its macroeconomic situation. Important creditor organisations included the Global Committee of Argentine Bondholders (GCAB),76 the Argentina Bond Restructuring Agency (ABRA),77 and the American Task Force Argentina (ATFA).78

73 74

75 76

77

78

Sturzenegger and Zettelmeyer, Debt Defaults, 165. Unemployment jumped from 14.7 per cent in 2000 to 18.1 per cent in 2001. The percentage of people living below the poverty line almost doubled, from 29 per cent in 2000 to 52 per cent in 2002 (Instituto Nacional de Estadistica y Censos, Encuesta Permanente de Hogares, 1988–2003). T. Smith, ‘Argentina preparing debt plan’, New York Times, 19 September 2003. The organisation reunites various national creditor groups, such as the Associazone per la Tutela degli Investitori in Titoli Argentini (TFA) in Italy. ABRA is a special-purpose vehicle established by HypoVereinsbank, which hired a private specialist in restructurings to negotiate with Argentina. Bondholders transferred their bonds to ABRA, and received special certificates in return. Any deal needed to be approved by an advisory board with an 80 per cent majority. Institutional investors, including hedge funds, are its main supporters: see www.atfa.org.


17

In Germany, bondholders created the Interessensgemeinschaft Argentinien e. V. in 2004. The first meeting between bondholder representatives and Argentina’s debt negotiators took place in December 2003. Thereafter, Argentina placed bondholders on hold for more than a year. One central area of disagreement concerned whether Argentina negotiated in good faith with its creditors. Argentina claimed that it was fully transparent about how much it could pay its creditors. Some creditors strongly disputed this claim, in particular in view of Argentina’s subsequent rapid increase in reserves and its strong economic growth.79 Bondholders, for instance, claimed that Argentina made ‘no good faith effort to reach a collaborative agreement’.80 One creditor representative described the initial offer as ‘barbarous’.81 At the beginning of 2005, Argentina restructured its external debt following its 2001–05 debt crisis.82 Argentina unveiled its final debt exchange proposal in November 2004. The exchange opened on 12 January 2005 and closed on 25 February 2005.83 Bondholders had a six-week window to tender their old bonds for new bonds with a much reduced face value, approximating a two-thirds haircut. Bondholders could choose among a number of new debt instruments. Holders of foreign-currency bonds had the option of receiving new foreign-currency bonds, or instead switching to peso bonds. No conversion of peso bonds into foreign currency, by contrast, was possible. In departure from past practice, Argentina would not pay past due interest. The payment terms attached to the various new debt instruments were similar.84 Argentina used a variety of incentives to encourage participation in the bond exchange. These included a GDP warrant, holding out the prospect of additional payment if Argentina’s GDP grew by more than 79

80

81 82

83

84

H. S. Scott, Sovereign Debt Default: Cry for the United States, Not Argentina (Washington Legal Foundation, Working Paper Series No. 140, 2006) (in favour of strengthening creditor rights by stripping central bank reserves of immunity). Filing with the US Securities and Exchange Commission (SEC) on 10 June 2004, quoted from J. Hornbeck, ‘Argentina’s sovereign debt restructuring’, Congressional Research Service, 19 October 2004. A. Thompson, ‘On the edge’, Financial Times, 8 March 2004, 17. Sturzenegger and Zettelmeyer, Debt Defaults, 165–201, provide an overview of Argentina’s default. Prospectus Supplement (to Prospectus dated 27 December 27) to the Republic of Argentina offer to owners of each series of bonds listed in Annex A of this Prospectus Supplement, 10 January 2005, Reg. No. 333–117111, www.sec.gov. Sturzenegger and Zettelmeyer, Debt Defaults, 188–91, provide greater detail on the precise terms.

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sovereign defaults

3 per cent; and a most-favoured creditor clause, to protect those creditors who tendered in the exchange against subsequent better treatment of holdout creditors. The objective was to tie the hands of Argentina’s executive, by automatically extending any more favourable term granted to non-participating creditors also to creditors tendering in the exchange. In 2010, Argentina launched a new debt exchange for the outstanding holders on similar terms to its 2005 restructuring. Of the creditors who did not participate in the 2005 exchange, out of more than $18 billion in bonds, 66 per cent tendered in 2010. This implies a creditor participation rate of 92.5 per cent in the 2005 and 2010 restructurings taken together.85 In February 2005, the Argentine Congress passed Ley 26017 which prohibited a reopening of the exchange and any settlement with nonparticipating bondholders.86 The law is designed to reduce the incentives for holding out. Article 2 provides that the Argentine executive cannot reopen its exchange offer. Article 3 prohibits judicial or outof-court settlement on the bonds. Article 4 calls upon the executive to delist the bonds in Argentina and abroad. Creditors variously contend that the true goal of Ley 26017 was to leave them out in the dark with worthless bonds. In Argentina’s 2005 restructuring, creditor participation at 77 per cent was unusually low. In most restructurings, participation exceeds 90 per cent. After the Securities and Exchange Commission approved the exchange and unsuccessful challenges to the exchange, 77 per cent of bondholders accepted the bond exchange. Participating bondholders received approximately 30 per cent of the original face value.87 Holders of about $20 billion in bonds initially did not tender in the exchange. Non-participating creditors filed 140 individual and 18 class action lawsuits in the US, obtaining judgments totalling about $6.4 billion.88 Several groups of creditors were also pursuing ICSID arbitration as an alternative remedy. In September 2006, 170,000 Italian bondholders initiated the first ICSID arbitration on sovereign bonds in the Beccara 85 86 87

88

J. Webber, ‘Argentina delighted over debt swap success’, Financial Times, 23 June 2010. Ley 26017, 10 February 2005. F. Sturzenegger and J. Zettelmeyer, ‘Haircuts: estimating investor losses in sovereign debt restructurings, 1998–2005’, IMF Working Paper No. 05/137 (Washington, DC: International Monetary Fund, 2005), present detailed estimates of haircuts of different bonds. Argentina, Prospectus, Securities and Exchange Commission, 28 April 2010.


19

case, requesting close to $5.5 billion in compensation from Argentina.89 This arbitration has been coordinated by the Global Committee of Argentina Bondholders (GCAB), one of the main bondholder organisations formed after Argentina’s default.

E.

Outlook

The subject of this book is the adjudication of sovereign defaults by international courts and tribunals and domestic claims settlement institutions that apply international law. The aim is to identify and assess decision trends. Analysing a wide range of cases arising out of sovereign defaults yields organising principles relevant for the future adjudication of sovereign defaults. There is a rich history of international cases on claims arising out of sovereign debt. This body of cases highlights important legal and policy considerations raised by the international adjudication of sovereign debt. Taken together, they shed light on the status of sovereign debt claims under international law.90 They also present different approaches to balancing the continued functioning of the debtor state with its repayment obligations. While international law generally has developed rapidly over the last few decades,91 the public international law on sovereign debt, and more generally the public international law of finance, lags behind. There are three principal reasons for this lack of progressive development of the law in matters of sovereign debt. First, on a worldwide scale, the three decades after World War II were characterised by atypical monetary stability. That stability temporarily relegated sovereign defaults to the background. Second, international lending takes place almost exclusively under municipal law. The law of several highly developed financial centres and their courts, especially in New York and London, are seen as providing 89

90

91

Beccara v Argentina (Confidentiality Order); Task Force Argentina’s Press Release of 18 September 2006, www.tfargentina.it/download/TFA-Comunicatostampa180906.pdf; ‘Bonistas italianos recurren ante el Ciadi’, La Nacioń (Argentina), 18 September 2006; B. Mander, ‘New tack on Argentina debt’, Financial Times, 28 September 2006. G. Olivares Marcos, ‘The legal practice of the recovery of state external debt’, Ph D thesis (University of Geneva, 2005), 104–38, surveys international arbitral awards and judgments on sovereign debt; G. Watrin, Essai de construction d’un contentieux international des dettes publiques (Paris: Sirey, 1929) covers the older case law. International trade, the law of the sea and international criminal law are three prominent examples of well-developed areas of international law.

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superior mechanisms for dealing with complex sovereign debt instruments. Third, there are doubts whether international financial law is indeed part of public international law.92 Many regard it as a quixotic sub-discipline divorced from public international law’s centre of gravity. These three factors imply that current international law plays a remarkably limited role in the resolution of sovereign debt crises. It is often unable to effectively protect the rights of sovereign creditors and to furnish mechanisms to relieve sovereign debtors in severe financial distress of some of their financial obligations. Treaty and customary law on sovereign debt is sparse. As a result, judgments and arbitral awards are of particular interest. In these decisions, international courts and arbitral tribunals tend to rely on general legal principles and often take municipal law into account. ICSID arbitration has come of age only over the last two decades, and only in the mid-2000s did bondholders start to consider ICSID arbitration as a mechanism to recover on defaulted debt. Why are historical cases from the nineteenth and early twentieth centuries on sovereign debt still relevant? Looking only at the few existing modern arbitrations that concern sovereign debt, it would be hard to discern the international law on public debt. Older cases are not only still instructive as to the general international law applicable, but also provide a rich source of experience to guide international adjudicators in future cases. The existing literature shows ICSID arbitration on sovereign debt to be a viable alternative to litigation in national courts.93 This book concludes that ICSID tribunals presently lack authority to adjudicate sovereign debt disputes. That said, arbitration more generally could

92

93

J. Crawford, ‘Public international law in twentieth-century England’, in J. Beatson and R. Zimmermann (eds.), Jurists Uprooted: German-Speaking Emigre´ Lawyers in Twentieth-Century Britain (Oxford University Press, 2004), 681–708, 681. Cf. P. Griffin and A. Farren, ‘How ICSID can protect sovereign bondholders’, IFLR, 24 (9) (2005), 21–24; A. Szodruch, ‘State insolvency: consequences and obligations under investment treaties’, in R. Hofmann and C. J. Tams (eds.), The International Convention for the Settlement of Investment Disputes (ICSID): Taking Stock after 40 Years (Baden-Baden: Nomos, 2007), 141–68; T. Wa ¨lde, ‘The Serbian Loans Case: a precedent for investment treaty protection of foreign debt?’, in T. Weiler (ed.), International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law (London: Cameron, 2005), 383–424; K. Halverson Cross, ‘Arbitration as a means of resolving sovereign debt disputes’, American Review of International Arbitration, 17 (2008), 335–81; O. Sandrock, ‘Is international arbitration inept to solve disputes arising out of international loan agreements?’, J Int’l Arb, 11 (1994), 33–60.


21

be an important tool for dealing with future sovereign defaults. This discussion is not only relevant for sovereign bonds, but for the arbitration of debt instruments and cross-border financial transactions more generally, including derivatives and structured financial products such as hedges and credit default swaps. The topic of sovereign defaults lies at the intersection of private and public international law.94 When creditors enforce sovereign debt obligations, the cases represent an exclusively private law character, at least at first sight. The presence of the sovereign debtor transforms such a dispute into one of a very particular kind. Disputes arising out of sovereign defaults are of a hybrid character and implicate important questions of public international law. Most sovereign defaults cannot be settled satisfactorily purely on the basis of contract law. Due to the financial crisis that started in 2008 government balance sheets are once again under growing stress as public borrowing soars and governments assume private liabilities.95 The market for sovereign debt has become truly international since the 1970s. A wave of sovereign defaults over the next decades would not be surprising. Resurgent interest in how international law in general and international dispute settlement in particular deals with sovereign defaults is likely. In thinking about the role international law could play in future sovereign defaults, understanding the rich history of past sovereign defaults is essential. Chapters 2 to 9 discuss the responses to sovereign defaults internationally over the last 150 years. Chapters 10 to 14 look at how international courts and tribunals may contribute to the resolution of future sovereign defaults.

94

95

C. Tietje, ‘Staateninsolvenz und Kapitalaufnahme auf internationalen Anleihema ¨rkten’, in S. Leible and M. Ruffert (eds.), Vo¨lkerrecht und IPR (Jenaer Wissenschaftliche Verlagsgesellschaft, 2006), 193–214. McKinsey Global Institute, ‘Debt and deleveraging: the global credit bubble and its economic consequences’, January 2010, 20–21; M. Waibel, ‘Bank insolvency and state insolvency’, in Rosa Lastra (ed.), Cross-Border Bank Insolvency (Oxford University Press, 2011), 345–67.

2

Political responses to sovereign defaults

The means by which sovereign debts may be collected have been hotly contested for more than two centuries.1 For some time, the use of force to compel repayment of sovereign debt was not uncommon. States diverged on whether the use of force in such conditions was permissible. Latin American states led the opposition to armed intervention, after European powers used force to enforce sovereign debt obligations against Mexico in the 1860s2 and Venezuela in 1902.

A. Discretionary support by creditor governments Creditor nations have often only been lukewarm debt collectors for funds that their nationals or residents lent to other governments. At times, creditor governments could pressure debtor governments into payment or settlement by means of superior bargaining power or the use of power politics, including the use of force. For instance, a hundred years ago, several European powers successfully pressed claims of their creditor nationals diplomatically against Turkey and Venezuela.3 In the case of Venezuela, military intervention followed. In lieu of direct diplomatic intervention, presentation and settlement of sovereign debt claims before mixed claims commissions were another

1

2

3

D. F. Vagts, ‘International economic law and the American Journal of International Law’, AJIL, 100 (2006), 769–82, 772. See R. J. Salvucci, Politics, Markets, and Mexico’s ‘London Debt’ 1823–1887 (Cambridge University Press, 2009). ´tat e´trangers’, JDI, 37 (1912), 420–39 discusses A. Wuarin, ‘Droit des porteurs de fonds d’E these episodes.

22

political responses to sovereign defaults

23

common way of dealing with sovereign defaults.4 However, more often than not, these commissions declined jurisdiction, unless there was an express and specific submission of sovereign debt instruments and clear evidence that the state of nationality was ready to present the case diplomatically.5 Traditionally, creditor countries enjoyed complete functional control over claims arising from sovereign debt. This is in line with the longstanding rule of international law that the exercise of diplomatic protection is a discretionary right of the country of nationality.6 However, governments may lack the authority to settle claims of their nationals in all circumstances.7 Governments were loath to add their support to the pressures their creditor nationals could exercise. Such functional control converted creditor countries into gatekeepers for enforcement and dispute settlement over sovereign debt claims. Diplomatic intervention did not automatically follow after each sovereign default, but depended on the creditor government’s own cost-benefit analysis. Creditor countries reserved substantial room for political and financial manoeuvre. They chose to elevate such payment disputes only after determining that internationalising the claim to a higher level was consistent with the government’s broader economic and political objectives. In the mid-nineteenth century, Lord Palmerston, the British foreign secretary known for his assertive diplomacy, set out British policy on diplomatic protection for bondholders. Such protection, he suggested, lay entirely within the political discretion of the government, for good policy reasons: Her Majesty’s Government had frequently had occasion to instruct her Majesty’s representatives in various foreign States to make earnest and friendly, but not authoritative representations, in support of the unsatisfied claims of British subjects who are holders of public bonds and money securities 4

5

6

7

E. Borchard, The Diplomatic Protection of Citizens abroad (New York: Banks Law Publishing, 1915), 302; A. Schoo, Re´gimen jurı´dico de las obligaciones monetarias internacionales (Buenos Aires: G. Kraft, 1940), 410, 37. E. Borchard, State Insolvency and Foreign Bondholders: Vol.1, General Principles (Yale University Press, 1951). ¨ sterreich und der Bundesrepublik Deutschland zur E.g. Vertrag zwischen der Republik O Regelung vermo ¨gensrechtlicher Beziehungen vom 15. Juni 1957, o ¨BGBI. Nr. 119/1958 and Articles 22 and 23 of the State Treaty: see I. Seidl-Hohenveldern, The Austrian–German Arbitral Tribunal (Syracuse, NY: Syracuse University Press, 1972). M. Kebedgy, ‘De la protection des creánciers d’un e´tat e´tranger’, JDI, 21 (1894), 59–72, 61; Borchard, State Insolvency and Foreign Bondholders, 230. On the possibility of waiving ICSID arbitration, see pp. 270–72.

24

sovereign defaults

of those States . . . it is for the British Government entirely a question of discretion, and by no means a question of International Right, whether they should or should not make this matter a question of diplomatic negotiation . . . It has hitherto been thought by the successive Governments of Great Britain undesirable that British subjects should invest their capital in foreign loans to foreign Governments instead of employing it in profitable undertakings at home; and with a view to discouraging hazardous loans to foreign Governments, who may either be unable or unwilling to pay the stipulated interests thereupon, the British Government has hitherto thought it the best policy to abstain from taking up as International Questions the complaints made by British subjects against foreign Governments which have failed to make good their engagements in regard to such pecuniary transactions. For the British Government has considered that the losses of imprudent men who have placed mistaken confidence in the good faith of foreign Governments, would prove a salutary warning to others, and would prevent any other foreign loans from being raised in Great Britain, except by Governments of known good faith and of ascertained solvency.8

The British government’s policy was to intervene diplomatically if it so chose. On the one hand, it showed ‘no particular zeal in resorting to action’. On the other hand, the British government, as the largest creditor nation in the world, lent official support to repayment claims when political and financial considerations weighed strongly in favour.9 Political motives often played a major role. The leading example is Egypt and, to a lesser degree, the Ottoman Empire in the 1870s. In Egypt, the British government assumed virtually complete control of the government. The apparent cause of this intervention was the debt default, but imperial policy and control over the Suez Canal were crucial factors.10 Palmerston’s memorandum is the most famous testament to the desire of governments to retain their freedom of action in responding to sovereign defaults and to limit the exercise of their creditor rights.11 Spain had defaulted on its debt to British bondholders in 1847, and 8

9 10 11

Quoted from R. Phillimore, Commentaries upon International Law, vol. 2 (London: Butterworth’s, 1882), 9–11. See also Viscount Palmerston’s intervention in the House of Commons, The Speech of Viscount Palmerston in Reply to the Motion of Lord George Bentinck, M.P. for an Address to Her Majesty in Favour of the Spanish Bondholders Tried and Compared with the Fundamental Law of this Country as Laid Down by Blackstone and Locke; and with the Principles and Rules of Grotius and Vattel (London: Essingham Wilson, 1848). H. Feis, Europe, the World’s Banker, 1870–1914 (Yale University Press, 1931), 105. Ibid., 108. And see ch. 3.C below. L. Buchheit, ‘The role of the official sector in sovereign debt workouts’, Chicago Journal of International Law, 6 (2005), 342.


25

Palmerston was faced with demands to take action. One MP suggested that Cuba and Puerto Rico could be used to repay the British holders. Palmerston flatly denied that it was expedient for the British government to go to war under these circumstances, but affirmed that Britain had every right to do so, and might use force in other cases.12 The view that lending abroad is undesirable as a general matter is outdated, but was prominent at the time. The belief was that for every dollar lost through default and not collected, an equivalent amount of wealth is lost at home.13 The emphasis Viscount Palmerston placed on creditor moral hazard is striking and as relevant today as in the nineteenth century. Creditor moral hazard refers to the phenomenon that implicit repayment guarantees (by the executive, the courts, or an international institution such as the IMF) to creditors modify the relative risk properties of financial instruments ex post, prompting creditors to assume excessive risk ex ante. Palmerston emphasised the ‘hazardous’ character and the need for a ‘salutary warning’ to creditors through the absence of governmental intervention – a timeless theme in international finance.14 If creditors came to expect government intervention as a right or as regular practice, then they would be likely to become more imprudent, in the expectation of official bailouts (creditor moral hazard). Official bailouts – a prominent characteristic of sovereign lending since at least World War I – change returns on sovereign debt ex post. Decisions by the courts, nationally and internationally, affect recovery rates on sovereign debt. ICSID arbitration, for example, could substantially change the costs of sovereign default to creditors.15 Another recurring theme in the long annals of sovereign defaults is the tension between the interests of private holders of government securities and governments as creditors. Creditor governments rarely subordinate their foreign policy to the goal of securing repayment of private debt. The interests of private and public creditors diverge typically to a greater degree in times of crisis, when the finances of debtor

12 13

14 15

Quoted from Moore, International Law Digest, vol. 6, 286. G. Sessions, Prophesying upon the Bones: J. Reuben Clark and the Foreign Debt Crisis, 1933–39 (University of Illinois Press, 1992), 20. For more on Britain’s subsequent policy, see Feis, Europe, the World’s Banker, 103–19. ICSID intervention may guarantee repayment to bondholders, independent of a country’s creditworthiness: see ch. 13.A below.

26

sovereign defaults

governments are under considerable strain. Private claims may compete with official claims for repayment.16 In the 1920s, the Hoover administration in particular grew concerned that rising lending to European countries would conflict with the repayment of official debt, especially war reparations. Similarly, the interests of bank creditors and bondholders and the IMF and European governments that provided financial assistance to Greece and Ireland in 2010 may come to diverge considerably over time.

B. Diplomatic protection Diplomatic intervention on sovereign debt instruments is legion.17 Foreign offices in all creditor countries faced the intractable problem that hundreds of holders of defaulted sovereign debt would approach them for diplomatic intervention every year. Few of the bondholders understood the delicate questions of international relations that such an approach involved. When the Chinese Republic defaulted on industrial bonds in the early 1920s, French parliamentarians inquired about the Quai d’Orsay’s plans for bringing justice to the thousands of French bondholders who lost money. The French foreign minister, under great domestic political pressure, responded that every possible diplomatic avenue was being pursued; that, however, the political situation remained volatile and complicated diplomatic intervention.18 Historically, creditor countries were often content with a subsidiary role in responding to sovereign defaults. Instead, they encouraged bondholder associations to assume centre stage in negotiations with defaulting countries. Some writers advocated a greater role for diplomatic protection in dealing with sovereign defaults, but governments did not heed such calls generally.19

16

17

18

19

K. Lissakers, Banks, Borrowers, and the Establishment: A Revisionist Account of the International Debt Crisis (New York: Basic Books, 1991), 167. JDI, 48 (1921), 873 (Serbia, China, Bulgaria); Borchard, State Insolvency and Foreign Bondholders, 217ff. Journal officiel, 1 December 1923; JDI, 51(1924), 530. Cf. also JDI, 45 (1918), 582 and JDI, 47 (1920), 542 (Russian bonds). C. Hyde, ‘The negotiation of external loans with foreign governments’, AJIL, 16 (1922), 540; League of Loans Committee, Second Annual Report, June 1934, 16ff; Borchard, State Insolvency, 236.


27

C. Loan sanctions Another response to sovereign defaults involves bans on lending. Loan sanctions, as part of economic statecraft, were used to achieve both economic and foreign policy objectives.20 Policy moved towards the stance that no private credit ought to be given to a foreign government in default. One of the most prominent loan sanctions was the Johnson Act in the United States, adopted after a surge in sovereign defaults during the Great Depression. All European governments, with the notable exception of Finland, defaulted on their debts.21 In 1933, about $1 billion ($250 billion, $14 billion) of more than $10 billion ($2.5 trillion, $140 billion) of about two hundred sovereign bonds floated in the United States were in default.22 It was increasingly clear that many governments had reached a tipping point: their debt obligations were soon to outstrip their ability to pay their debts in full. More than half a million American holders of defaulted sovereign debt were affected.23 After an investigation of past lending practices, Congress wanted to ‘prevent a recurrence of the practices which were shown by the investigation to be little less than a fraud upon the American people . . . to curb the rapacity of those engaged in the sale of foreign obligations’. It noted that ‘billions of securities . . . offered for sale to the American people’ were in default and that ‘some of these foreign bonds and obligations . . . were sold by the American financiers to make outrageously high profits’.24 At the time, the US State Department had ‘virtually unchecked powers to encourage or discourage foreign loans’.25 Lenders often submitted proposed loans to the State Department. The Department was unequivocal 20

21

22

23 24 25

H. D. Lasswell, ‘Political policies and the international investment market’, The Journal of Political Economy, 31 (1923), 380–400. Act to Prohibit Financial Transactions with Any Foreign Government in Default on Its Obligations to the United States, 13 April 1934; Statement of President Roosevelt to Joint Meeting of Congress, 3 January 1934, Congressional Record, Vol. 78, 5. Borchard, State Insolvency and Foreign Bondholders, 228 ($12 billion); J. T. Madden, M. Nadler and H. C. Sauvain, America’s Experience as a Creditor Nation (New York: Prentice-Hall, 1937) (over $9 billion). FBPC, Annual Report, 1934, 12, and 102–217. Committee Report on the Act, Senate Report 20 and House Report 974, 73d Congress. H. Feis, ‘The export of American capital’, Foreign Affairs, 3 (1925), 685; L. C. Buchheit, ‘The role of the official sector’, 333–43, 337; Hyde, ‘Negotiation of external loans’, 541 (American bankers are not likely ‘indisposed to act in harmony with the wishes of the Government’). A good example is the China Consortium Agreement, 15 October 1920, AJIL, 16 (1922), 4.

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that despite its desire to be informed about the activities of US lenders abroad, it lacked the power to require American Bankers to consult it. It will not pass upon the merits of foreign loans as business propositions, nor assume any responsibility whatever in connection with loan transactions. Offers for foreign loans should not state or imply that they are contingent upon an expression from the Department of State regarding them, nor should any prospectus or contract refer to the attitude of this Government.26

The Johnson Act made it unlawful for any person subject to US jurisdiction to sell bonds, securities or other obligations of a foreign government or political subdivision in default to the US government. Violations were to be punished by fine or imprisonment for up to 5 years. There was an exception for new indebtedness incurred with a view to satisfy old creditors – the refinancing of debt for the payment of creditors. The Act raised difficult issues of interpretation and had important implications for sovereign lending.27 The term default was imprecise. Did it cover any failure to make payments to the US government? Investigating the legislative history, the US Attorney General denied that such a broad reach of the statute was intended. Token payments were sufficient to take the country outside the act’s scope of application.28 Congress’s intention was not to discontinue all commercial relations with defaulting governments, and hence only securities offered to the public were captured by the act.29 He concluded that neither Britain nor Czechoslovakia, Italy, Latvia and Lithuania were in default.30 The matter was different as regards the Soviet Union. With reference to principles of international law and scholarly writings, Attorney General Cummings concluded that the Soviet government was the successor to the Tsarist government and that hence the Soviet government’s repudiation in 1917 implied that the Soviet Union was in default on its obligations to the United States.31 Particularly interesting is that the pendency of negotiations for a possible settlement did not alter that conclusion. These negotiations, with interruptions, continued for seven decades all the way through to the collapse of the Soviet Union, without a successful conclusion. 26

27

28

Department of State, Statement for the Press on Flotation for Foreign Loans, 3 March 1922, quoted from Hyde, ‘Negotiation of external loans’, 540. Attorney General of the United States Homer Cummings to Secretary of State, Opinion upon the Act to Prohibit Financial Transactions with Any Foreign Government in Default on its Obligations to the United States, AJIL, 29 (1935), 160–67. 29 30 31 Ibid., 165. Ibid. Ibid., 163. Ibid., 166.


29

Cummings also referred to President Roosevelt’s statement of 7 November 1933 regarding British indebtedness arising out of World War I: For some weeks representatives of the British Government have been conferring with representatives of this Government on the subject of the British debt to this country growing out of the World War . . . I am also assured by that Government that it continues to acknowledge the debt without, of course, prejudicing its right again to present the matter of its readjustment, and that on December 15, 1933, it will give tangible expression of this acknowledgment by the payment of seven and one half million dollars in United States currency. In view of these representations, of the payment, and of the impossibility, at this time, of passing finally and justly upon the request for readjustment of the debt, I have no personal hesitation in saying that I shall not regard the British Government in default.32

Since the 2000s, the question of the ‘odious’ character of lending to repressive regimes has received much attention. Some authors advocate ex ante loan sanctions to deter lending to repressive regimes where there is a risk that such lending would be ‘odious’. An example of such an ex ante loan sanction is UN Security Council Resolution 661 that provided, inter alia, that ‘all States shall not make available to the Government of Iraq or to any commercial, industrial or public utility undertaking in Iraq or Kuwait, any funds or any other financial or economic resources’.33 Member countries adopted national measures of implementation.

D. The use of force Military interventions over sovereign debt were another feature of international lending.34 Such intervention was in some cases driven by power politics, without any prior recourse to peaceful methods of 32 33

34

Ibid, 161–62. J. F. Dulles, ‘Our foreign loan policy’, Foreign Affairs, 5 (1926), 33–48; H. D. Lasswell, ‘Political policies and the international investment market’, The Journal of Political Economy, 31 (1923), 380–400 provides an overview of the use of loan sanctions. S. Krasner, Problematic Sovereignty: Contested Rules and Political Possibilities (New York: Columbia University Press, 2001), 127ff; D. S. Landes, Bankers and Pashas: International Finance and Economic Imperialism in Egypt (New York: Harper Row, 1969); M. Finnemore, ‘Sovereign default and military intervention’, in The Purpose of Intervention: Changing Beliefs about the Use of Force (Ithaca: Cornell University Press, 2003), 24ff; A. S. De Bustamante y Sirven, ‘La Seconde Confe´rence de la Paix, Chapter III: le recouvrement coercitif des dettes nationales’ (1909), 272; Henri-M. Imbert, Les Emprunts d’e´tats étrangers, recours individuels et action collective des creánciers (Paris: A. Leclerc, 1905), 60–99; N. Politis, Les Emprunts d’e´tat en droit international (Paris: A. Durand et Pedone-Lauriel, 1894), 60–99.

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dispute settlement. In other cases, the use of force served as a means of enforcing arbitral awards against recalcitrant debtors. The French–British intervention in Mexico in 1862 was ostensibly to obtain repayment for their creditor-nationals; France and the UK installed Maximilian of Habsburg on the Mexican throne. Default on a loan to a French-Swiss bank was one justification advanced for the French intervention. But broader political objectives, including control over Central America, were again in play.35 When Egypt and Turkey suspended debt payments in 1876, France and the United Kingdom intervened militarily to strengthen their presence in Asia Minor and North Africa. At times, countries used force to secure payment of international arbitral awards, for lack of other enforcement mechanisms.36 Such forcible intervention defeated the very purpose of arbitration: the peaceful settlement of international disputes. Yet political rather than financial motives often explained the use of force to compel repayment on sovereign debt. For instance, the primary reason behind the use of force in the Venezuelan blockade of 1902 that led to the Venezuelan Preferential Case was not a desire to aid bondholders, but rather the broader object of permanently ending Venezuelan attacks against foreign nationals as well as their physical property.37

The Venezuelan Preferential Case The following facts gave rise to the Venezuelan Preferential Case.38 The United Kingdom, Germany and Italy employed gunboat diplomacy.39 They bombarded a number of Venezuelan ports, sank three Venezuelan warships and took over customs revenue houses in order to obtain 35

36

37

38

39

E. W. Turlington, Mexico and Her Foreign Creditors (New York: Columbia University Press, 1930), 141. Two good examples are the Cerruti Arbitrations (Italy v Colombia; see also W. Benedek, ‘Cerruti Arbitrations’ in EPIL vol. 2) and Pacifico Claim (Great Britain v Greece) (blockade to pressure Greece to compensate a British national, Daniel Pacifico, for losses of his private property). For a general overview, see Krasner, Problematic Sovereignty, 127ff. F. G. Dawson, The First Latin American Debt Crisis: The City of London and the 1822–25 Loan Bubble (Yale University Press, 1990), 231. Venezuelan Preferential Case. M. Silagi, ‘Preferential claims against Venezuela Arbitration’, in R. Bernhard (ed.), EPIL, vol. 2, 234–35; J. H. Ralston, Venezuelan Arbitrations of 1903, 58th Cong., 2nd Session, Senate Document No. 316 (Washington, DC: Government Printing Office, 1904); W. L. Penfield, ‘The Venezuelan Arbitration before the Hague Tribunal, 1903’ (Washington, DC: Government Printing Office: 1905). De Bustamante y Sirven, ‘La Seconde Confe´rence de la Paix’, 272; J. Basdevant, ‘L’Action coercitive Anglo–Germano–Italienne’, RGDIP, 12 (1904), 362–458 provides a detailed account of the facts giving rise to the arbitration.


31

satisfaction for certain claims, including claims arising out of Venezuela’s public debt. Faced with the European blockade, Venezuela soon relented. The attitude of the United States was not as unequivocal as the Monroe Doctrine might suggest. US President Roosevelt was torn. He believed that conflict was probably avoidable, but at the same time he believed strongly in the civilising power of the more developed states and he did not want ‘to put [the United States] in the position of preventing the collection of an honest debt’.40 Venezuela and the three European powers did not agree on the amount of outstanding debt. One estimate put the amount of principal and interest in default to German bondholders at $12.5 million ($7.4 billion, $265 million), compared to $2.5 million for British bondholders ($1.5 billion, $53 million), with a smaller sum for the Italian holders.41 A settlement concluded in Washington included an arrangement for Venezuela’s sovereign bonds, and provided cash sweeteners to appease the intervening powers. Ten arbitral commissions were set up and called upon to decide whether this unilateral enforcement by military intervention entitled the intervening powers to preferential payment of their claims under international law. The Council of Foreign Bondholders lent full support to the blockade and the arbitration, but noted with disappointment that bondholder claims were only placed in third rank, behind individual claims and industrial claims, secured by a preferential charge on customs revenues.42 To resolve a number of claims against Venezuela, the German and Venezuelan governments concluded a protocol.43 In exchange for compensation on expropriated assets, the German government committed to immediately lift the blockage of Venezuelan ports and to resume diplomatic relations (Article 8). Article 5 of the Protocol provided as follows: For the purposes of paying the claims specified in article 3 [claims resulting from Venezuela’s civil war plus several German companies to be submitted to a Mixed Commission seated at Caraćas] as well as similar claims preferred by other powers the Venezuelan government shall remit to the representative of the Bank

40

41 43

D. Munro, Intervention and Dollar Diplomacy in the Caribbean, 1990–1921 (Princeton University Press, 1964), 71. 42 Ibid., 67–69. CFB Rep (1902–1903), 15. Protocol between Germany and Venezuela relating to the Settlement of German Claims.

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of England at Caraćas in monthly instalments, beginning from 1 March, 1903, 30 per cent of the customs revenues of La Guayra and Puerto Cabello, which shall not be alienated for any other purpose. Should the Venezuelan government fail to carry out this obligation Belgian customs officials shall take charge of customs in the two ports and shall administer them until the liabilities of the Venezuelan government in relation to the above claims are discharged. Any questions as to the distribution of the customs revenues specified in the foregoing paragraph, as well as to the rights of Germany, Great Britain and Italy to a separate payment of their claims, shall be determined, in default of another agreement, by the Permanent Tribunal of Arbitration at the Hague. All other Powers interested may join as parties in the arbitration proceedings against the above mentioned Powers.

Article 6 contained an undertaking by the Venezuelan government with respect to its sovereign debt: to settle a loan that was largely in German hands and the entire external debt. The Venezuelan Preferential tribunal consisted of two eminent Russian lawyers, N. V. Mourawieff and F. de Martens, and H. Lammasch of Austria–Hungary. In defence of their request for preferential treatment, the blockading powers invoked two rules: first, that preference ought to be given to those who take action to protect their rights (vigilantibus non dormientibus subvenit lex) and, second, the rule that the right of the one who comes first is stronger (prior in tempore, potior in iure). Hence, they claimed preferential satisfaction for those creditors who first obtained possession of assets.44 As a subsidiary argument, they claimed they carried out a negotiorum gestio for the neutral powers. The neutral powers posited the rule of equal creditor treatment based on Venezuela’s purported insolvency. They based their argument largely on a private law analogy to municipal insolvency law. According to this general principle of law, creditors enjoy, as a rule, equal rights in financial distress.45 The intervening powers attempted at great length to defeat this equal treatment claim. At several levels, their argument took issue with the analogy from domestic insolvency law being applied to the international plane. First, bankruptcy procedures diverge; second, international law says nothing about bankruptcy of states; third, the seizure of all property would be inconsistent with the state’s continued existence as an independent community.46 Fourth, Venezuela was also in no way compelled 44 46

45 Ralston, Venezuelan Arbitrations of 1903, 862–63. Ibid., Case of France, 880. Ibid., Case of Italy, 857–58; Counter-Case, 1038–39.


33

to distribute all its assets. In fact, it was not genuinely insolvent, since it would be able to pay its liabilities with good economic management.47 Italy argued that liquidating all assets of sovereign states was impossible. The property of a state is not subject to proceedings of the nature of sequestration or seizure. Any such process would be inconsistent with the continued existence of the State as an independent community. It is obvious therefore that it is impossible to apply to States the procedure of bankruptcy as it is applied to individuals or societies [companies].48

Britain also maintained that Venezuela’s situation could not be compared to the insolvency of a private debtor: This is not a case analogous to bankruptcy, to cessio bonorum or renditio bonorum, or to other like systems, by which the estate of an insolvent debtor is divided equally among his creditors . . . Venezuela is not insolvent. There is no suggestion that key assets are insufficient to meet key liabilities: moreover, the basis of all bankruptcy systems is the surrender by the debtor of his whole estate.49

In addition, Britain maintained that there was a fundamental incompatibility between sovereign insolvency and the sovereign equality of nations. International law knows no such procedure as bankruptcy of a nation, nor does it provide any machinery by which the assets of an insolvent state can be administered or distributed among creditors. Indeed, any such procedure must necessarily be incompatible with the continued existence of the insolvent State as an independent sovereign State.50

The intervening powers also argued that the expenses they alone incurred to implement the blockade also benefited other nations (negotiorum gestio). These positive spillover effects to all creditors, they contended, further strengthened their preferential claims. The neutral nations replied that the elements of negotiorum gestio were not present. Neither had the intervention served the neutrals’ interests, nor were they ignorant of this purported management.51 Instead of benefiting them, these unilateral enforcement actions by the intervening powers put additional strain on Venezuela’s already limited public finances.52 47 48 50 52

Ibid., Counter-Case, 1043, Sir Robert Finlay, 1248–49; Counter-Case of Great Britain, 976. 49 Ibid., Case of Italy, 858. Ibid., Case of Britain, 764–65. 51 Ibid., Counter-Case of Great Britain, 977. Ibid., Counter-Case of Spain, 1096. Ibid., Counter-Case of the Netherlands, Sweden and Norway, 1110.

34

sovereign defaults

As a result, the intervention, which substantially diminished the aggregate financial assets of Venezuela available for distribution, could not be said to have been carried out on behalf of all creditors. Yet France was prepared to accept the analogy to negotiorum gestio insofar as preferential payment was limited to expenses incurred by the intervening powers in the interests of the neutral countries.53 Venezuela argued strongly in favour of equal treatment of all its creditors.54 The tribunal held that the blockading powers enjoyed priority on the 30 per cent of customs revenues in the ports of La Guayra and Puerto Cabello set aside specifically for their debt service: the three powers ‘have a right to preference in the payment of their claims by means of these 30 per cent of the receipts of the two Venezuelan Ports’.55 From today’s perspective, it is particularly problematic that the pledge of customs revenues was the direct result of the resort to armed force by the three powers.56 The tribunal buttressed its decision by reference to the principle of estoppel. In separate protocols with the three blockading powers, Venezuela had accepted the justice of their claims in principle.57 Yet the protocols with the neutral powers contain no such declaration. During subsequent diplomatic negotiations, Venezuela formally distinguished the allied from the neutral powers, guaranteeing punctual and preferential discharge of the former’s debt obligations only. Hence, Venezuela was estopped from disputing the interveners’ right to preferential payment. The neutral nations were also estopped from reclaiming treatment on a par with the blockading powers. The arbitral tribunal held that those neutral nations which now claimed equality of treatment in the distribution of Venezuelan customs receipts did not protest against the preferential claims of the intervening powers after cessation of

53 54

55 56

57

Ibid., Case of France, 883. A. Mallarme´, ‘L’Arbitrage veńe´zue´lien devant la Cour de la Haye’, RGDIP, 13 (1906), 423, 542. Venezuelan Preferential Case (Award), 110. Cf. Mallarme´’s poignant criticism in ‘L’Arbitrage veńe´zue´lien’: ‘il semble bien que la the`se qu’elle contient ne soit pas conforme au principe de la paix internationale. ` un pays creáncier un privile`ge a` l’e´gard d’autres creánciers, par Reconnaıˆtre, en effet, a ` la force pour faire valoir ses revendications, c’est le´gitimer cela seul qu’il a eu recours a et encourager l’emploi de cette force’ (496–97). On the estoppel in this case, see D. W. Bowett, ‘Estoppel before international tribunals and its relation to acquiescence’, BYBIL, 33 (1957), 21–51, 42ff.


35

hostilities or the signature of 1903 Protocols, despite their ability to do so.58 The use of force relating to sovereign defaults was inimical to peaceful conduct of international relations, and gave rise to strong objections by affected debtor states: the most prominent of these critiques is the Drago Doctrine.

The Drago Doctrine A central figure in this struggle to free debtor governments from creditor coercion was Luis Maria Drago, the Argentine foreign minister from 1902 to 1903. The military intervention by the United Kingdom, Germany and Italy in Venezuela prompted Drago to propose a new variant of the Monroe Doctrine. Writing in the inaugural issue of the American Journal of International Law in 1907,59 Drago contended that the use of force to enforce sovereign debt was an illegitimate foreign policy tool that violated international law, and framed it as an extension of the Monroe Doctrine. The Drago Doctrine posits that ‘public debt cannot occasion armed intervention nor even the actual occupation of the territory of American nations by a European Power’. Its rationale was to to preserve the peace, dignity and independence of nations.60 Drago immediately cautioned that this policy was no ‘defense for bad faith, disorder, and deliberate and involuntary insolvency’. Fischer Williams summarised the Drago Doctrine: (1) Foreign bonds do not represent a contractual obligation of the issuing state to the bondholder comparable to the obligation arising from a private contract. (2) The issue of a foreign bond is, like the issue of money, the act of the sovereign authority which has the same legal freedom to repudiate its apparent obligation on the bond as it has to depreciate its currency. (3) Sovereignty or a sovereign state being subject to no control, when sovereignty is in question there can be no denial of justice because no court has jurisdiction.61 58 59

60

61

Venezuela Preferential Case, 109. L. M. Drago, ‘State loans in their relation to international policy’, AJIL 1 (1907), 692–726; C. Kennedy, ‘The Drago Doctrine’, North American Review, 185 (1907), 614–22 (in defence of military intervention to collect debt). ˜ or Minister of Foreign Relations of the Argentine Republic to the L. M. Drago, ‘Note of Sen Minister of the Argentine Republic to the United States, Buenos Aires, December 29, ´blicas (Buenos Aires: 1902’, AJIL, 1 (1907), 1–6, 5; L. M. Drago, Cobro coercitivo de deudas pu ´tat et leurs rapports avec la Coni Hermanos, 1906) and L. M. Drago, ‘Les Emprunts d’E politique internationale’, RGDIP (1907), 251–86. This intervention gave rise to the Venezuelan Preferential Case, discussed in the preceding section. J. Fischer Williams, International Law and International Financial Obligations Arising from Contract (Leiden: Brill, 1924), 16.

36

sovereign defaults

The emphasis of the Drago Doctrine, contrary to Fischer Williams’ suggestion, is not on the absence of a contractual obligation. Rather, its overarching purpose is to prevent the unilateral recovery of sovereign debt using military force, a form of intervention that was not altogether uncommon at the time. However, the Doctrine has a subversive element, in that it has the potential of undermining compliance with sovereign debt obligations – a concern that was widespread among creditors at the time. Not surprisingly, the major capital countries long remained sceptical about the Drago Doctrine. Diplomatic reactions were cool.62 International lawyers split across the same fault line. Even as committed an internationalist as Sir Hersch Lauterpacht noted that ‘the rule that intervention is not allowed for the purpose of making a State pay its public debts, is unfounded, and has not received general recognition’.63 A notable exception is Judge Jessup, who showed some sympathy for the philosophy underlying the Drago Doctrine. Dissenting in the Barcelona Traction Case, he ruminated on bondholder protection in international law: ‘There are, of course, abundant precedents for protection of bondholders – I refer to the holders of corporate bonds and not the holders of government bonds which raise entirely different legal (and political) problems, as Drago clearly showed.’64 Judge Jessup drew a clear demarcation line between corporate and sovereign bonds, and appears to share common ground with Drago. In his academic writing, he sounded a cautious note: [In cases where bonds are bought at a large discount], the case seems to be a clear one for the assumption of the risk of default by the lender and not by the borrower. Banking practice calculates the risk, discounts it in advance, and sets the price of the issue and the interest rate in appreciation of the risk. It is obviously inequitable to permit a situation where they may eat their cake and have it too in the sense that default will bring to bear the military power of their state to exact 100 per cent compliance, perhaps through the seizure of customs houses or other revenue-producing assets. If the use of force for the collection of the loan were lawful, the bonds should be issued on terms

62

63

64

See also P. C. Jessup, A Modern Law of Nations: An Introduction (New York: Macmillan, 1956), 113–15. Cf. only L. Oppenheim and H. Lauterpacht, International Law: A Treatise, 8th edn (London: Longmans, 1955), 309 note 3. Barcelona Traction (Second Phase), Separate Opinion of Judge Jessup, 207.


37

reflecting not the financial and political hazards of the borrowing state, but the superior military power of the state of the lender.65

These bitter experiences with European and US investors led to deep-seated hostility in Latin America towards arbitration to resolve disputes with foreign investors and creditors.66 European powers were initially sceptical about restricting the use of force on public debt. Their hesitation derived in part from fears that this partial ban on using force could enable debtor countries to evade valid debt obligations. Gradually, they too recognised that the use of force to enforce sovereign debt threatened world peace, international economic relations and the efficient functioning of the sovereign debt market. After a brief gestation period, Drago’s proposal formed a core agenda item at the Second Hague Peace Conference and directly influenced the restriction on the ius ad bellum on sovereign debt adopted by the Conference. A compromise was reached at The Hague.67 The Drago– Porter Convention sought to avoid armed conflict between nations arising out of pecuniary claims. It prohibits use of force to recover ‘contract debts’ unless the debtor state ‘refuses or neglects to reply to an offer of arbitration, or, after accepting the offer, prevents any compromis from being agreed on, or, after the arbitration, fails to submit to the award’.68 Preference is given to arbitration as a peaceful means of settling sovereign defaults. However, the use of force as a residual tool remains lawful.69 Arbitration must be attempted before states use force as ultima ratio. In 1912, the State Department assured a creditor willing to lend to Honduras that an arbitration clause in the loan contract would provide effective relief, since the US government had the option of using force if ever the Honduran government refused to arbitrate or pay the award.70 In 65 66

67

68

69

70

Jessup, A Modern Law of Nations, 115. D. Vagts, ‘Foreword’, in M. Waibel et al. (eds.), The Backlash against Investment Arbitration (Amsterdam: Wolters Kluwer, 2010), xxiv. Convention Respecting the Limitation of the Employment of Force for the Recovery of Contract Debts. L. Oppenheim and H. Lauterpacht, International Law: A Treatise, 5th edn (London; New York: Longmans, 1935), 309, emphasises that ‘the stipulations of this Convention concern the recovery of all contract debts, whether or not they arise from public loans’. Feis, ‘Export of American capital’, 686 (advocating an enlargement to cover all pecuniary obligations). Macatee to the Secretary of State, 9 February 1948, FRUS 1948 (1975), V, Pt. II: 611.

38

sovereign defaults

the Norwegian Loans Case, the ICJ interpreted the Convention in this sense. The court held that the aim was not ‘to introduce compulsory arbitration in the limited field to which it relates. The only obligation imposed by the Convention is that an intervening Power must not have recourse to force before it has tried arbitration.’71 Furthermore, inter-state debts are outside the scope of the Convention, and hence a residual right to use force without any prior resort to arbitration remained.72 Even though the Convention gave states largely unchecked discretion to use armed force as a practical matter, it was nevertheless a ‘jalon essentiel’ in prohibiting the use of armed force to settle international disputes.73 It was a compromise between US aspirations for general arbitration, Latin America’s principled stance against military intervention on sovereign debt74 and the interests of European creditor states: an obligation to arbitrate but only for certain money claims. Latin American states remained long worried about the loophole that legalised the use of force in certain cases. Commentators also criticised the fact that the convention implicitly allowed use of force in all matters aside from contract debts. Borchard was disappointed: ‘viewed objectively’ the Convention ‘may not mark any advance: it failed to solve any practical problem’.75 Debtor countries had little choice but to accept arbitration in view of the Damoclean sword of the use of force that continued to hang over their heads. The Drago–Porter Convention represented a gradual yet significant step toward outlawing the use of force on sovereign debt. It was also a trailblazer for restricting the use of force in international law. One had to wait until after World War II when Article 2 (4) of the UN Charter generalised the principle of the Drago–Porter Convention by outlawing the use of force in international law.

E.

Diplomatic settlements

The Soviet debt repudiation of 1917 had tremendous implications in France. The French government had actively encouraged its citizens to buy Russian sovereign debt to strengthen their military alliance. They did so in huge numbers. When World War I commenced, four-fifths of

71 72 73 74

Norwegian Loans Case (France v Norway), Pleadings, 24. A. Reinisch, State Responsibility for Debt (Vienna: Bo ¨hlau, 1995), 13. D. Nguyen Quoc, P. Daillier and A. Pellet, Droit international public (Paris: LGDJ, 1987), 809. 75 Drago, ‘State loans’, 692–726. Borchard, State Insolvency and Foreign Bondholders, 272.


39

the Russian debt was in French hands.76 The large supply of credit was the price France paid for the alliance. German chancellor Bismarck, conversely, had banned any German from buying Russian debt.77 In 1920, The Economist was optimistic about the possibility of a settlement: ‘coupons will eventually have a value, inasmuch as even a Bolshevist Government will find itself constrained to attract foreign capital by proposing a settlement of the Russian debt . . . it has already indicated that it might be prepared to discuss a settlement of the Russian debt’.78 This prognosis proved much too optimistic in retrospect. Prospects for a swift settlement soon receded. In the 1920s, the Soviets participated in three conferences to discuss a possible settlement with its creditors. Russia had time, and pointed to repudiations of debts by the United States and France during their respective revolutions.79 In 1927, the Soviets offered to repay French holders 15 per cent of their claims in exchange for access to the French capital markets – a proposal that France swiftly rejected.80 In October 1928, creditors started to bundle their efforts. They formed an international committee of creditors. The major European bondholder associations were all represented on the Committee, and they committed themselves not to conclude separate deals with the Soviets.81 During World War II, Russia received financial assistance under LendLease, but defaulted also on these obligations in 1947. The first important settlement of the Soviet repudiation was achieved in the mid-1980s. In 1986, Russia and the UK settled the claims of British bondholders. Russia paid £82 million, or about 63 per cent of the original nominal value, without taking account of any accrued, unpaid interest. When the Soviet Union collapsed, the United States was still negotiating a final settlement of the 1917 repudiation. France and Russia settled the consequences of the Soviet repudiation in the mid-1990s.82 In 1996, Russia formally recognised its liability for Tsarist 76 78 79

80 82

77 Feis, Europe, the World’s Banker, 211. Ibid., 52. The Economist, 17 January 1920. L. Moore and J. Kaluzny, ‘Regime change and debt default: the case of Russia, AustroHungary, and the Ottoman Empire following World War I’, Explorations in Economic History, 42 (2005), 237–58, 249. 81 Ibid. 249. Ibid. 249. See the Convention of October 1990 between Russia and France, Le Monde, 28/29 October 1990 and S. Szurek, ‘Epilogue d’un contentieux historique: l’accord du 27 mai 1997 entre le gouvernement de la Re´publique Française et le Gouvernement de la Fe´de´ration de Russie re´latif au re´glement de´finitif des creánces rećiproques entre la France et la Russie ante´rieures au 9 mai 1945’, AFDI, 44 (1998), 144–66.

40

sovereign defaults

debt. In 1997, France and Russia concluded a settlement for 3 billion francs (272 million pounds, about 42 per cent). Payment was completed in 2000. Diplomatic negotiations have continued to play an important role in responding to sovereign defaults. For instance, in 2006, Italian Prime Minister Romano Prodi held a high-level meeting with Argentine President Kirchner to obtain redress for Italian bondholders. The meeting took place at the margins of the United Nations Annual General Assembly.83 Italian bondholders bought an estimated 8 billion dollars in Argentine sovereign bonds. Conversely, creditor countries on occasion also use diplomacy in favour of debtor countries. In such cases, they often seek to achieve collective action by all creditor nations. An example is the substantial debt reduction conferred on Iraq after the US invasion within and outside the Paris Club framework in 2009.84 The United Nations Security Council played an unusually prominent role. After the collapse of Saddam Hussein’s regime, Iraq’s total outstanding debt amounted to $129 billion. In a variety of restructurings, Iraq settled $90 billion and $39 billion remain outstanding. The Paris Club played a major role. It restructured more than $51 million in debt. Moreover, Iraq reached debt settlements with 51 other official creditors on conditions similar to the Paris Club restructuring. Over $20 billion in commercial debt with almost 600 commercial creditors has been restructured and only $600 million remains outstanding by mid-2010.85 In resolution 1483 (2003), the Security Council ‘welcome[d] the readiness of creditors, including those of the Paris Club, to seek a solution to Iraq’s sovereign debt problems’86 and emphasised ‘the desirability of prompt completion of the restructuring of Iraq’s debt’.87 The Security Council

83

84

85 86

87

ń entre Kirchner y Prodi surgio ´ el tema de los bonistas’, ‘Nueva York: En la reunio Clarıń, Buenos Aires, 19 September 2006. D. Vagts, ‘Sovereign bankruptcy: In re Germany, In re Iraq (2004)’, AJIL, 98 (2004), 302–06; ‘Paris Club agrees to substantial debt relief for Iraq’, AJIL, 99 (2005), 260; C. Smith, ‘Major creditors in accord to waive 80% of Iraq debt’, New York Times, 22 November 2004, 4; M. A. Weiss, ‘Iraq: Paris Club debt relief, CRS Report for Congress’, Congressional Research Service (2005), 6. UN Security Council Records, S/PV.6293, 6 April 2010. S/RES/1483 (2003), para. 15; Executive Order 13303, ‘Protecting the Development Fund for Iraq and Certain Other Property in Which Iraq Has an Interest’, implements the resolution in the United States. S/RES/1483 (2003), para. 22.


41

gave Iraq a shield of immunity for its most important sources of revenue. The Council decided that petroleum, petroleum products, and natural gas originating in Iraq shall be immune, until title passes to the initial purchaser, from legal proceedings against them and not be subject to any form of attachment, garnishment, or execution, and that all States shall take any steps that may be necessary under their respective domestic legal systems to assure this protection, and that proceeds and obligations arising from sales thereof, as well as the Development Fund for Iraq, shall enjoy privileges and immunities equivalent to those enjoyed by the United Nations except that the abovementioned privileges and immunities will not apply with respect to any legal proceeding in which recourse to such proceeds or obligations is necessary to satisfy liability for damages assessed in connection with an ecological accident, including an oil spill, that occurs after the date of adoption of this resolution.88

88

S/RES/1905 (2009) extended the immunity until 31 December 2010; S/RES/1956 (2010) terminated the immunity with effect from 30 June 2011 and calls for a postDevelopment Fund mechanism by the same time.

3

Quasi-receivership of highly indebted countries

The quasi-receivership of countries with high levels of debt was a method of enforcement short of military intervention. Several examples are found on the European continent.1 In Greece, for instance, the International Financial Commission of Control managed several revenue sources pledged for service of external debt from 1898 onwards. Such pledges were a common feature of international debt administration in the late nineteenth century.2 In Egypt, the Caisse de la Dette exercised the same function until 1940.3 In the Ottoman Empire, the Ottoman Debt Council held sway over Ottoman finances from 1876 onwards. These quasi-receiverships resulted from collective creditor action. Alongside other European creditor nations, Great Britain called on the Ottoman Empire to establish an international debt administration to take charge of revenues for the satisfaction of its sovereign debt. The British government gave ‘firm, but moderate assistance’ to its creditors.4 The United States, even though not acting as blatantly as European powers, also assumed fiscal control over debtor countries. The intrusiveness of financial control varied.5 The US championed a more benign type of receivership in Santo Domingo, Haiti, Honduras and Nicaragua. These debtor countries pledged their customs revenues to

1

2 3

4 5

E. Borchard, State Insolvency and Foreign Bondholders: Vol.1, General Principles (Yale University Press, 1951), 286–95. T. H. Irmscher, ‘Pledge of state territory and property’, MPEPIL. G. Watrin, Essai de construction d’un contentieux international des dettes publiques (Paris: Sirey, 1929), 117. H. Feis, Europe the World’s Banker, 1870–1914 (Yale University Press, 1931), 108. Watrin, Essai de construction, 282.

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quasi-receivership of highly indebted countries

43

the repayment of external debt under US-supervised receiverships.6 In effect, the Dominican Republic was governed by the US military from 1916 to 1924 – and collection of the debt was guaranteed by the US navy.7 The receivership lasted from 1907 to 1940. Distaste for European methods of enforcing sovereign debt was one of the factors that gave rise to the US approach of receivership conventions. The Honduras–US and Nicaragua–US conventions followed the model of the Dominican Republic, but specified a more elaborate priority ranking of claims. The collector general was nominated by the US government alone, and appointed by the debtor governments. The United States effectively ran major parts of the debtor country’s economy.8 Herbert Feis, the State Department’s economic adviser from 1931 to 1943, acknowledged that the US government had a ‘hand of one kind or another in the financial administration of Cuba, San Domingo, Haiti, Nicaragua and other Central American states . . . our government has also helped these countries to secure loans, and determined in part the loan conditions. We are in a position approaching financial guardianship to these countries, in some instances by virtue of treaty arrangements, in others merely because of previous assumption of responsibility.’9 He cautioned that whether these interventions would improve US relations with the debtor countries hinged on benevolent and equitable administration by the US government.

6

7

8

9

Treaty Regarding Finances, Economic Development and Tranquility (Haiti–US), 16 September 1915, 39 Stat. 1654; Convention Concerning Customs Revenues (Dominican Republic–US), 8 February 1907, 35 Stat. 1880; ‘The San Dominican “Enabling Act”’, AJIL, 1 (1907), 978; The Proposed Loan Conventions Between the United States and Honduras and the United States and Nicaragua, AJIL, 5 (1911), 1044 (neither ever ratified); A. De la ˆle ame´ricain’, RGDIP, 17 (1911), Rosa, ‘Les finances de Saint-Dominique et le contro 401–49; 19 (1912), 499–583; 19 (1912), 72–121. K. Lissakers, Banks, Borrowers, and the Establishment: A Revisionist Account of the International Debt Crisis (New York: Basic Books, 1991), 167. J. A. Frieden, ‘Capital politics: creditors and the international political economy’, Journal of Public Policy, 8 (1988), 265–86, 275. Cf. Manifesto of the National Congress to the Honduran People, 14 February 1911, leading the Honduran Congress to reject the Convention with the United States, USFR, 1912, 577; such intervention may be seen as an example of legalised hegemony, G. Simpson, Great Powers and Outlaw States: Unequal Sovereigns in the International Legal Order (Cambridge University Press, 2004). H. Feis, ‘The export of American capital’, Foreign Affairs, 3 (1925), 680; C. C. Hyde, ‘The negotiation of external loans with foreign governments’, AJIL, 16 (1922), 523–41, 535 (characterising this ‘efficacious’ arrangement as ‘a receiver or trustee authorized to fulfil the functions of collecting and distributing for the service of the loan the funds designed to serve that purpose’).

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sovereign defaults

Agreements providing for quasi-receiverships over highly indebted countries often included arbitration clauses, in case disagreements between the debtor country and the organisation charged with administrating the debt or the creditors arose. The following sections examine five examples of arbitrations arising out of fiscal control: the Serbian Autonomous Administration of Monopolies, the Greek International Financial Commission of Control, Egypt’s Caisse de la Dette, Haiti and the Dominican Republic.

A. Serbia’s Autonomous Administration of Monopolies In Serbia, the Autonomous Administration of Monopolies at Belgrade was charged with safeguarding external debt service, independent of the government. Several state monopolies were pledged as security for debt services. The administration consisted of two bondholder representatives, the Governor of the Serbian Central Bank and his Deputy plus two other Serbian nationals. The delegate for the French holders of Serbian bonds on the Administrative Council of the Autonomous Administration of Monopolies brought a claim for unpaid remuneration. He requested compensation for his service on the Council from 1941 onwards after German authorities expelled him and because Yugoslavia dissolved the Council in 1946. ´tat denied the claim on both grounds. With The French Conseil d’E respect to the first claim, the delegate failed to show any Yugoslav action that was capable of falling under the Franco-Yugoslav Agreement of 14 April 1951 to compensate French nationals for nationalisations or other restrictive measures. The second claim was also unmeritorious, as the dissolution of the Council was part of Yugoslavia’s internal reorganisation.10

B. The Greek International Financial Commission of Control Financial control in Greece lasted from 1899 to 1931.11 Greece had lost the Turkish–Greek war of 1898 decisively, and was unable to pay the large war indemnity without borrowing abroad.12 The European powers installed an International Financial Commission of Control. Revenues from several monopolies were assigned as security for the external debt. 10 12

Re Campion (1960). Ibid., 313.

11

Borchard, State Insolvency and Foreign Bondholders, 335.


45

The Commission’s assigned revenues were fixed, but Greece experienced high inflation due to the use of the printing press to finance the war against Turkey. The Commission insisted that bondholders be paid in gold, whereas Greece contended that only the equivalent in gold francs of the fixed sum was due to bondholders.13 Article 14 of the law of control provided: In case of disagreement between the International Commission and the Hellenic Government with regard to the interpretation or execution of the present Law and the Royal Decrees issued in conformity with its provisions, recourse shall be had to arbitration. If the parties do not agree in the choice of a sole Arbitrator, they shall each appoint an Arbitrator wihin one month, counting from the day on which arbitration is demanded. If the Arbitrators so designated do not succeed in coming to an agreement, the appointment of a third Arbitrator shall be entrusted by the parties, or by one of them, to the choice of the President of the Swiss Confederation. The Arbitral Award shall always be final.14

When the parties failed to agree on a presiding arbitrator to settle a dispute arising out of the depreciation of the drachma from 1922 to 1926 that reduced the payments to the Greek bondholders under the system of conversion that the financial commission had applied, the Swiss President appointed Alexandre Moriaud, a prominent parliamentarian and finance secretary in Geneva, as third arbitrator. The bonds concerned were denominated in gold francs. The commission had adopted the practice of calculating the payment due to bondholders on the basis of gold francs. The Greek government took the view that bondholders should only receive as much as the paper franc was worth in 1926. The Greek government emerged victorious from this dispute. Arbitrator Moriaud found that the Commission of Financial Control had for several years applied a method of conversion which seemed to violate the spirit of the Law of Control, and resulted in greatly exaggerated payments by Greece. But the arbitrator also increased the annuity to be paid by Greece by one fifth to compensate for high inflation in Greece. The next section examines ad hoc international tribunals established in the wake of Egypt’s sovereign debt crisis in the second half of the nineteenth century.

13 14

Ibid., 341. Quoted from Borchard, State Insolvency and Foreign Bondholders, 341–42, n. 15; CFB Rep (1928), 21, 190; CFB Rep (1927), 21; IFC v Greece, Award of Arbitrator Moriaud, November 1928.

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sovereign defaults

C. Egypt’s Caisse de la Dette After sliding into financial distress in 1876, Egypt established a council representative of its creditors.15 The Caisse de la Dette’s task was to protect the collective rights of Egypt’s creditors under the aegis of international mixed tribunals.16 These tribunals were not special courts with exclusive competence to hear disputes between Egyptians and foreign nationals in civil and commercial matters.17 They were created by Egyptian decree in 1876, and confirmed by the 1880 law of liquidation on 17 July 1880. In the Dongola Case, the mixed tribunal of Alexandria examined the character of the mandate given to the commissioners of the debt.18 The question was whether the Caisse de la Dette was authorised to charge the expenditure of the Dongola expedition to the reserve fund. Under Article 18 of the law of liquidation, the Caisse’s tasks consisted in assuring regular debt service and in acting before the international mixed tribunals to ensure that the law of liquidation was implemented. The Dongola tribunal held that under the financial mandate the commissioners were neutral mediators between Egypt and creditors’ collective interests, not exclusively representatives of creditors, but the safekeepers of Egypt’s well-being.19 They could not be driven by their own national interests.20

15

16 17 18 19

20

On the nature of the Egyptian mixed international tribunals, see N. Politis, ‘La Caisse de la dette e´gyptienne, ses pouvoirs et sa responsabilite´’, RGDIP, 3 (1896), 245–52; See also W. Kaufmann, ‘Le Droit international et la dette publique e´gyptienne’ (1891) RDIPC, 72; Padao-Bey, ‘De la compe´tence de la juridiction mixte dans les contestations entre ´tat en Egypte’, JDI, 15 (1888), 300–16; les indige`nes et les administrations de l’E W. Kaufmann, Das internationale Recht der egyptischen Staatsschuld (Berlin: Puttkammer & ´gypte’, RGDIP, 1 (1894), 126–35; ¨ hlbrecht, 1891); P. Fauchille, ‘Les Tribunaux mixtes d’E Mu Borchard, State Insolvency and Foreign Bondholders, vol. 2, 575ff; G. Feder and R. E. Just, ‘Debt crisis in an increasingly pessimistic international market: the case of Egyptian credit, 1862–76’, Economic Journal, 94 (1984), 340–56; D. S. Landes, Bankers and Pashas: International Finance and Economic Imperialism in Egypt (Harvard University Press, 1979). Watrin, Essai de construction, 250–53. J. Y. Brinton, The Mixed Courts of Egypt (Yale University Press, 1930). Watrin, Essai de construction, 222–28. Dongola v Egypt (1891), 285: ‘Ils ne sont pas exclusivement des repre´sentants des creánciers, mais bien les gardiens du bien-eˆtre financier de l’Egypte.’ H. Babled, ‘Le Proce`s de la caisse de la dette égyptienne devant la cour mixte d’Alexandrie : le jugement et les actes d’appel’, RGDIP, 3 (1896), 537–57; H. Babled, ‘Le Proce`s de la caisse de la dette e´gyptienne et l’arreˆt de la cour d’Alexandrie’, RGDIP, 4 (1897), 124–36. Babled, RGDIP, 3 (1896), 554.


47

D. Fiscal Administration in Haiti In the case of Haiti, a 1915 agreement foresaw that the United States would lend its good offices to aid ‘in the establishment of the finances of Haiti on a firm and solid basis’. The US President was to nominate a General Receiver and Financial Advisor, to be appointed by the Haitian President, to collect customs revenues. Before the advent of corporate, income and other personal taxes, customs revenues were for many governments the most important source of revenue, especially in the developing world. Obligations were to be satisfied in the following order of priorities: (1) administrative expenses of the receiver and his staff, (2) debt service, (3) police and (4) Haiti’s current expenses. Haiti was precluded from incurring further debt, modifying the customs duties or leasing or selling any of its territory. Finally, the two governments agreed to arbitrate all pending pecuniary claims (Article 12).21

E.

The Dominican Republic’s receivership

The United States became the de facto receiver of the Dominican Republic in 1905, a control that lasted until 1940.22 The US decision to take over fiscal management for the Caribbean nation was momentous.23 One historian compared it to Great Britain’s earlier intervention in Egypt in 1878.24 The intervention in the Dominican Republic had its origins in US domestic politics.

Private fiscal control In 1893, the New York-based Santo Domingo Improvement Company (SDIC) with close ties to the US political establishment became the financial powerhouse for Dominican foreign debt. It bought the entire Dominican foreign debt from a Dutch company.25 The company, working closely with the dictatorial Dominican president, sold bonds worth more than $30 million in Europe ($26 billion, $710 million).26 No debt securities were offered for sale in the United States. From 1893 to 1897, Dominican 21

22

23 24

25

‘The Proposed Loan Conventions between the United States and Honduras and the United States and Nicaragua’, AJIL, 5 (1911), 1044. C. Veeser, A World Safe for Capitalism: Dollar Diplomacy and America’s Rise to Global Power (Columbia University Press, 2002). Veeser, World Safe for Capitalism, 2. E. S. Rosenberg, Financial Missionaries to the World: The Politics and Culture of Dollar Diplomacy, 1900–1930 (Harvard University Press, 1999), 60. 26 Veeser, World Safe for Capitalism, 11. Ibid., 3.

48

sovereign defaults

debt quintupled from under $5 million ($4.6 billion, $114 million) to over $35 million ($31 billion, $0.8 billion).27 Such over-borrowing pushed the nation in due course to the brink of financial collapse. The SDIC’s activities were a crucial trigger for the receivership. Lending to the Dominican Republic was secured on customs revenues, vested in a Re´gie, under the SDIC’s control.28 The SDIC collected customs revenues and assured debt service on behalf of the Republic. The SDIC’s contract with the Dominican Republic provided for the creation of an International Commission of Control in case of default. It would be composed of representatives of all the important creditors, and ‘take entire charge of the finances of the country on the plan of the Egyptian Commission’, explained SDIC counsel Frederick William Holls, later secretary to the first Hague Peace Conference.29 However, he also confided in the State Department that representation of European creditor representatives, especially the major powers France, Britain and Germany, was not genuinely envisaged, but only foreseen to pacify public opinion in Europe.30 This private statement pointed to SDIC’s conflict of interest. Legally, it was the trustee for bondholders, by overseeing fiscal management and the collection of customs duties for all creditors. In practice, however, it became increasingly the private financial agent for the Dominican government.31 After the default in 1897, the SDIC could have invoked the clause providing for the establishment of a commission. Instead, it continued to collect fees by refinancing the Dominican debt, only postponing the inevitable day of reckoning.32 John Bassett Moore, the tireless advocate of international arbitration and SDIC’s counsel, acted as the primary interface between the company and the US government.33 Settlement negotiations for the SDIC’s debts proved difficult, as successive Dominican presidents insisted on a proper accounting and investigation of the company’s dealings that appeared increasingly fraudulent. The State Department proposed flat compensation of $4.5 million ($2.5 billion, $90 million) to the Dominican government, without any investigation.34 27 28 29 30 33

34

Ibid., 76. The CFB noted the tribunal’s composition with approval, CFB Rep (1902–03), 346. Ibid.; Veeser, World Safe for Capitalism, 26. 31 32 Ibid. Ibid., 78. Ibid., 96. Ibid., 6, 105 (‘a powerful and articulate champion’ ‘in projecting the SDIC’s influence within the highest circles of government’). Ibid., 108; CFB Rep (1902–03), 349.


49

The SDIC preferred a bilateral solution and negotiations solely with the US government. Moore explained that an international commission, as a ‘great remedy’, ‘should not be applied except in extreme cases, and [the company] preferred negotiation and arrangement’. An international commission would be ‘distinctly hostile to American interests’, and for that reason the ‘US government might look with displeasure on the establishment of a Commission . . . controlling the financial interests of a Republic so near a neighbor to herself’.35 Popular unrest about the economic and social conditions led to the assassination of the Dominican president, the expulsion of the company from the Republic in early 1901 and the refusal to honour the company’s debts. The SDIC was stripped of control over customs revenue collection. The US dispatched warships to underscore its commitment for payment of the debt. Due to the perilous state of Dominican finances – the country was in effect bankrupt – there was a threat of intervention by European creditors. With respect to debts owed to SDIC, the US’s preferred option was arbitration.36 The US government decided to step in and take over fiscal management, stripping the SIDC of the de facto control it had enjoyed for a full decade.37 Eventually, the Dominican Republic yielded to sustained US pressure and in 1903 signed a protocol providing for payment to the SDIC. The terms, such as guarantees for the payments and the payment schedule, were referred to arbitration. Two subsequent Dominican leaders first refused to abide by the protocol, but buckled under relentless American pressure, including the threat to break off diplomatic relations and of non-recognition.38

The Santo Domingo Improvement Company arbitration The central question in the SDIC arbitration was how much the Dominican Republic could pay. Moore wore a double hat as the representative of the State Department and SDIC’s counsel, as he himself acknowledged.39 Moore prefaced his argument with a reference to the hardworking character of Dominican people, and added ‘there is nothing in

35 36

37 38 39

United States v Dominican Republic (US Counter-Case, 1904), 97, 106–07. C. Lipson, Standing Guard: Protecting Foreign Capital in the Nineteenth and Twentieth Centuries, (Berkeley: University of California Press, 1985), 15. Veeser, World Safe for Capitalism, 4. Ibid., 109; the CFB noted the agreement with ‘much satisfaction’, CFB Rep (1902–1903). Veeser, World Safe for Capitalism, 110–12.

50

sovereign defaults

the life or character of the Dominican to incapacitate him from paying enough money yearly to provide for an orderly administration of the national finances’.40 The historical background for this arbitration matters. Gunboat diplomacy by Germany, Italy and Britain against Venezuela was recent history indeed, and the Venezuelan Preferential arbitration had just been decided. This background was very much on Moore’s mind when he expressed optimism that ‘an award may be made in the [Dominican] arbitration here as will render it easy for our Government to . . . avoid such a situation as has resulted in Venezuela’.41 Moore presented a two-pronged argument on behalf of the United States. He first denied that the Dominican Republic was an effective government, despite formal sovereignty, by reference to revolution, corrupt administration and wasteful expenditure. Notwithstanding, the government was bound to pay the debt to the SDIC. He argued that revolutions and anarchy are no excuse for the non-payment of debt.42 Nor should the government’s chronic instability and fiscal ineptitude be taken into account when measuring the Republic’s ability to pay the debt. The yardstick was a well administered Dominican Republic, which differed materially from currently prevailing conditions.43 But there was a limitation: repayment could not put ‘improper or undue strain on the people’.44 He then set out in detail how much the Republic could in fact pay, and arrived at the conclusion that revenues of $2.5 million ($1.3 billion, $50 million) were achievable with sound fiscal administration. Government expenditures could be cut to $800,000 ($0.45 billion, $16 million) a year, leaving more than $1.5 million ($0.83 billion, $30 million) for debt service.45 The Dominican population was about 600,000 people.46 Moore affirmed that the Dominican Republic was not insolvent and could pay its European creditors as well. He did not stop there, but presented detailed proposals for a radical restructuring of the Republic’s finances, including abolishing the army and police (despite ongoing civil unrest and challenges to the government), as well as the ministry of justice and public works, and administrative reform.47

40 42 43 46

41 United States v Dominican Republic, Argument of the United States, 31. Ibid., 112–13. United States v Dominican Republic, Argument of the United States, 22, 63. 44 45 Ibid., 21–22. Ibid., 28. Ibid., 22–28. 47 CFB Rep (1902–03), 343. Veeser, World Safe for Capitalism, 115.


51

External oversight was essential to ensure progress and long-term debt sustainability,48 and the only authority capable of providing such oversight was the United States. Moore advocated the creation of a Caisse of Dominican debt, with its officers appointed by the United States.49 He drew an explicit analogy to Egypt, where British control, buttressed by the presence of a small number of troops, through the Caisse had led to lasting improvements in fiscal management. Moore argued that Egypt and Santo Domingo shared many similarities.50 The Dominican Republic first underscored that Moore’s appeal to the rule of law and his presentation of a wide-ranging plan for US government intervention pursued the goal of imbuing in the arbitrators ‘a prejudice against the Dominican people and their government’, by portraying their nation as an ungrateful debtor with no respect for contracts, property and civil order.51 They expressed misgivings that the protocol left aside any question about the origin of the debt, and pointed out that they were deliberatedly refraining from shining the light on SDIC’s business practices and its incestuous relationship with the Dominican Republic’s former dictator.52 The Dominican Republic disagreed with Moore’s figures. The maximum primary surplus it could achieve was half a million, because revenues above $1.7 million ($0.95 billion, $33 million) were unrealistic and because it needed at least $1.2 milion ($0.6 billion, $24 million) for its own expenditures, especially in order to re-establish law and order. Despite these broad pleadings, the arbitral tribunal’s powers were limited, and explicitly it could only set the monthly payment schedule and provide for security.53 Its decision was unanimous in favour of SDIC. It established a payment schedule, doubled the amount due each month and assigned the revenue of three customs revenue houses as security for such payments.54 It prescribed 4 per cent interest a year. Should the Dominican Republic default, the US government was to appoint a fiscal agent to take control of customs revenue houses. The tribunal said nothing about the claims of European creditors. The Council of Foreign Bondholders expressed its disappointment with the settlement, noting that ‘the claims of the English bondholders

48 49 51 53 54

United States v Dominican Republic, Argument of the United States, 54–55. 50 Ibid., 112–14, 139. Ibid., 68. 52 Ibid., Argument of the Dominican Republic, 3. Ibid. Borchard, State Insolvency and Foreign Bondholders, 234–39; CFB Rep (1902–03), 360–62. Veeser, World Safe for Capitalism, 119; CFB Rep (1902–03), 350.

52

sovereign defaults

were ignored, and the settlement had been imposed on them not only without their consent but in spite of their protest’. French and Belgian bondholders received 10–25 per cent more than their English counterparts.55 Soon after the tribunal handed down its award, it became apparent that the Dominican Republic’s reservations about its payment capacity were accurate. Despite strong lobbying by the SDIC in Washington for its position in the Republic to be maintained after the US government had already stripped it of the collection function – a request which the US government refused56– it was now clear that the sum awarded to the SDIC could not be paid in full.

The US receivership After a payment default by the Dominican Republic, the United States appointed an SDIC official to be the American financial agent in the Republic. He arrived aboard a warship and took over customs revenue houses for the SDIC.57 Moore continued to wear two hats: trusted adviser to the State Department and the President and highly paid counsel to SDIC. He received $10,000 ($1 million, $0.55 million)58 in 1904 for services rendered to SDIC, and $800 ($87,000, $45,000) per month in the future.59 The de facto priority enjoyed by SDIC over European creditors became a growing diplomatic irritant. The SDIC official acting as fiscal agent discriminated against European creditors. Only American and British creditors were paid.60 The debt of all European creditors was about $22 million ($1.1 billion, $430 million).61 European governments made diplomatic representations, and talk about the possible seizure of ports by European powers was the order of the day.62 Already under tremendous political criticism and diplomatic pressure, the Roosevelt administration engineered a policy shift in its approach to the Dominican Republic. 55 56 57 58

59

60 62

CFB Rep (1908), 22. The President’s message to the Senate referred to in CFB 30th Annual Report, 360. Veeser, World Safe for Capitalism, 124. The first figure is converted with MeasuringWorth using the unskilled wage, the second refers to the value of a consumer bundle. Veeser, World Safe for Capitalism; Moore attempted ‘to serve two masters, and failed’, ibid., 154. 61 Ibid., 132; CFB Rep (1902–03), 357. Ibid., 359. Ibid., 351 (President Roosevelt referring to the ‘urgent menace of intervention’).


53

The US government finally realised that it was ‘impossible under existing conditions . . . to defray the ordinary expenses of the [Dominican] Government and to meet its obligations’.63 It also had serious concerns that the SDIC claim was inflated or partly fraudulent. Suddenly, the SDIC fell out of favour. The arbitral award was no longer sacrosanct. The administration proceeded rapidly to review all pecuniary claims against the Dominican Republic, threatening much potential embarrassment to the SDIC. Jacob Hollander conducted a thorough investigation, including of SDIC’s $4.5 million claim.64 The SDIC was stripped of its de facto priority when the US receiver took over the administration of customs revenue houses from the SDIC’s financial agent.65 Moore lobbied the State Department on behalf of SDIC, arguing that the arbitral award constituted a ‘definitive settlement’ of the claim – one that was immune from readjustment even in receivership.66 Hollander presented a scathing report to President Roosevelt, including the charges that SDIC had abused the bondholders’ trust, had never rendered satisfactory accounts and had in fact been an obstacle to good fiscal management in the Dominican Republic.67 Hollander, who gained much credit with his thorough investigation of SDIC, also became the subject of a scandal. He became US financial agent in the Dominican Republic in 1907, but accepted a $100,000 ($10 million, $5.1 million)68 payment from the Dominican Republic at the same time.69 A restructuring of the debt, under the auspices of a much stronger oversight role in the form of the receivership by the United States, was now inevitable. It was a reality that the SDIC only grudgingly accepted. After several unsuccessful attempts to lobby the US government to change course, the SDIC agreed to the restructuring and the US Senate 63

64

65 67

68 69

Message from the President of the United States, transmitting a Protocol of an agreement between the United States and the Dominican Republic, providing for the collection and disbursement by the United States of the customs revenues of the Dominican Republic, 4 February 1905. Hollander was an economist at Johns Hopkins University, former Treasurer of Puerto Rico under the McKinley administration and confidential agent of the US to San Domingo from 1907. He was instrumental in the restructuring of the Dominican debt from 1905 onwards. 66 Veeser, World Safe for Capitalism, 144. Ibid., 147. Ibid., 149; CFB Rep (1902–03), 360 (referring to commissions and deductions which implied that the Republic received only between 50 and 75 per cent of the debt’s nominal value). The first figure is based on the unskilled wage, the second on the consumer bundle. Veeser, World Safe for Capitalism, 154.

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sovereign defaults

soon thereafter ratified the treaty establishing the receivership.70 The arbitral award also came under fire. The English creditors, who were subsumed in the arbitral award, lobbied HM government for diplomatic intervention71 and complained bitterly about the award being set aside: It is difficult, however, to understand the principle upon which these Governments have assumed the right to set aside, even though temporarily, an Award rendered by an International Court of Arbitration, and to put the preferential rights secured by such an Award into a hotch-potch with unsecured and undefined claims. ‘Vested rights’ in all property are explicitly protected by the Constitution of the United States, and cannot be destroyed or impaired by either Legislative or Executive action.72

The justification for the receivership was twofold. First, to ensure the financial rehabilitation of the Dominican Republic and the equitable payment of creditors; second, it was legitimated by a desire to deflect a looming intervention by European powers seizing territory in the Western hemisphere. President Theodore Roosevelt rationalised the receivership as furthering international equity when transmitting the convention to the US Congress: [These] debts have been contracts beyond the power of the Republic to pay. Some of these debts were properly contracted, and held by those who have a legitimate right to their money. Others are, without question, improper or exorbitant, constituting claims which should never be paid in full, and perhaps only to the extent of a very small portion of the nominal value. Certain foreign countries have long felt themselves aggrieved because of the non-payment of debts due to their citizens. The only way by which foreign creditors could ever obtain from the Republic itself a guarantee of payment would be either by the acquisition of territory outright or temporarily, or else by taking possession of the customshouses, which would of course in itself, in effect, be taking possession of a certain amount of territory . . . the United States has not the slightest desire for territorial aggrandizement . . . [It will only exercise the control] necessary to [the Dominican] financial rehabilitation in connection with the collection of revenue, part of which will be turned over to the Government to meet the necessary expense of running it, and part of which will be distributed pro rata among the creditors of the Republic upon a basis of absolute equity . . . the justification for the United States is to be found in the fact that it is incompatible with international equity for the United States to refuse to allow other powers to take the only means at their disposal of satisfying the claims of their creditors, and yet to refuse itself 70 72

71 Ibid., 152. CFB Rep (1902–03), 368. Message from Theodore Roosevelt to the Senate, quoted from the Proposed Loan Convention, 1051; see also CFB Rep (1902–03), 355–66 (printing this ‘lengthy’ document in full because of its importance).


55

to take any such steps . . . the United States Government, following its traditional usage in [cases of violations of contracts and concessions], aims to go no further than the mere use of its good offices, a measure which frequently proves ineffective. On the other hand, there are Governments which do sometimes take energetic action for the protection of their subjects in the enforcement of merely contractual claims.73

President Roosevelt noted that arbitration has become ‘nugatory’ in this case. Referring to the precedent set by the Venezuelan Preferential Arbitration, he justified the US receivership by the right of preferential payment that European powers would otherwise obtain through arbitration, thereby sacrificing US claims.74 He affirmed that the ‘ordinary resources of diplomacy and international arbitration are absolutely impotent to deal wisely and effectively with the situation in the Dominican Republic’.75 Invoking the Republic ‘drifting into a condition of permanent anarchy’, the President also underscored that the United States had refused joint fiscal control proposed by European governments earlier.76 The choice for the United States, as it presented itself to President Roosevelt, was one between an almost certain infringement of the Monroe Doctrine, or decisive action. He emphasised that the proposed treaty was consensual and had the full support of the Dominican Republic, sheltering her from European intervention.77 The President also referred to the Platt Amendment which prevented Cuba from additional borrowing without US approval as a ‘most wise measure of international statesmanship’ with model character for the Dominican Republic.78 Article II of the Platt Amendment provided: ‘That [Cuba] shall not assume or contract any public debt, to pay the interest upon which, and to make reasonable sinking fund provision for the ultimate discharge of which, the ordinary revenues of the island, after defraying the current expenses of government shall be inadequate.’ Two conventions provided for the collection and disbursement by the United States of Dominican customs revenues. The United States and the Dominican Republic concluded a protocol in January 1905, whose preamble referred to imminent intervention by creditors and the need for a comprehensive debt restructuring. The Dominican Republic declared itself attached to its obligations towards its creditors, and the United States pledged its assistance to that effect. The United States 73 78

74 75 76 77 Ibid., 359. Ibid., 363. Ibid. Ibid. Ibid., 364. J. H. Hollander, ‘The Convention of 1907 between the United States and the Dominican Republic’, AJIL, 1 (1907), 287–96, 289.

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assumed control of Dominican customs, and tariff levels could not be lowered as long as debt was outstanding. A figure of 45 per cent was dedicated to the use of the Dominican government, and 55 per cent went to the payment of creditors.79 The 1905 agreement provided specifically that the United States government agrees to attempt the adjustment of all the obligations of the Dominican government, foreign as well as domestic; the adjustment of the payment and of the conditions of amortization, the consideration of conflicting and unreasonable claims, and the determination of the validity and amount of all pending claims. If, in order to reach such adjustment, it shall be considered necessary to name one or more commissions, the Dominican government shall be represented on said commissions.

The 1905 agreement encountered resistance in the US Senate, and was never ratified.80 However, the Dominican Republic expressed its desire for an interim arrangement to avoid creditor intervention, which came into effect on similar terms as foreseen in the protocol. The economic situation in the Dominican Republic stabilised, and customs revenues saw high double-digit growth.81 In view of the arrangement’s success, the two countries moved towards a more long-term mechanism. Velazquez, the Dominican minister of finance, became special commissioner. A $20 million loan from Kuhn, Loeb & Co. in New York would serve to repay existing debt, and was conditional on the conclusion of a treaty with the United States for the management of Dominican customs revenues. Existing claims were rescheduled, with a haircut ranging from 10 to 90 per cent of the nominal claims.82 ‘Haircut’ is the technical term for the write-off of the net present value of principal and interest due in a debt restructuring. The average reduction was about 45 per cent for external debt and 25 per cent for domestic debt.83 There were questions about the validity of many debts.84 The second Convention of 1907 provided for the appointment of a Special Receiver by the United States. The Dominican Republic pledged to lend all assistance and protection to the receiver. Both the Dominican and the US government approved the accounts of the general receiver on 79 82

83 84

80 81 Ibid., 290. Ibid., 291. Ibid., 292. Ibid., 293; Veeser, World Safe for Capitalism, 152 (Dominican holders only received 10 per cent of their claims). Hollander, ‘The Convention of 1907’, 293. Convention Concerning Customs Revenues (Dominican Republic–US), 8 February 1907, 35 Stat. 1880; ‘The San Dominican “Enabling Act”’, AJIL 1 (1907), 978.


57

a monthly basis.85 Compared to the 1905 protocol that never entered into force, the US government merely administered the customs revenues, and had no role in the adjustment and verification of Dominican debt. The duration of the agreement was for fifty years, and could be terminated earlier if the loan was amortised in full. Hollander noted that the agreement discharged ‘debts to the amount not of their nominal value, but of their equitable worth’.86

85

Ibid.

86

Ibid., 295.

4

Monetary reform and sovereign debt

Sovereign debt restructuring shares many similarities with a currency reform. Both are general regulatory measures designed for a specific macroeconomic purpose. In the case of currency reform, the goal is typically to bring inflation under control, or, more generally, to establish a sound unit of account that allows for the trade in goods and services at an appropriate exchange rate. In the case of sovereign debt restructuring, the goal is to return debt to sustainable levels (and, often incidentally, reduce inflation too). It is a long-established principle of international law that states are entitled to regulate their own currency. In Emperor of Austria v Day and Kossuth (1861), the English Court of Appeal in Chancery found that the Emperor of Austria had, as the King of Hungary, the sole and exclusive right of issuing and regulating currency in Hungary, including the right to regulate the currency and to determine its value in relation to other currencies. In the history of sovereign defaults, a number of disputes have involved changes to the unity of account in which sovereign debt is payable. How courts and tribunals have resolved such disputes is the subject of this chapter. In Juillard v Greenman (1884), the US Supreme Court also affirmed a broad principle of monetary sovereignty. In Norman v Baltimore & Ohio Railroad (1935), the most important gold clause case in the United States following the Great Depression, the court explained that debts suffered from a ‘congenital infirmity’ and that they might be changed by the competent legislator. They are not property. In Perry v United States the Supreme Court held that the abrogration of contractual gold clauses fell within the reach of congressional authority when such clauses presented a threat to the monetary system. Plaintiff Perry lacked a cause of action. 58

monetary reform and sovereign debt

59

The Zuk Claim concerned rouble bonds issued in 1912.1 Through currency reform, these bonds had become largely worthless. The Commission found that devalued bonds did not give rise to a claim under international law. In Crane v Austria, the Tripartite Claims Commission upheld bond clauses guaranteeing payment in two or more currencies to protect bondholders against future devaluations.2 The difference between the two cases is that the Zuk Claim was a domestic debt, whereas in Crane there was an explicit guarantee by Austria to pay in several foreign currencies. In Eisner v United States of America, the claimant alleged that the German currency conversion, exchanging Reichsmarks for Deutschmarks at a prescribed rate on the orders of the US military commander in Berlin in 1948, expropriated 95 per cent of his bank account. The US Court of Claims declined just compensation, relying on an analogy to bankruptcy law that orders claims according to their worth and social importance. It reasoned as follows: ‘The task of occupying powers in a great and complex country such as Germany, whose own Government had completely collapsed, was an almost insuperable one. Certainly it included the power to establish a rational monetary system . . . Like any other fundamental change of law or Government policy, it brought hardship to some people. Such hardship cannot, of course, be regarded as creating claims against the Government, else all legal change would become fiscally impossible.’3 The Permanent Court of International Justice and the International Court of Justice decided three cases involving sovereign debt instruments and modifications to the unit of account: Serbian Loans, Brazilian Loans, and Norwegian Loans Cases.4 The present chapter first discusses the facts and judgments in Serbian Loans and Brazilian Loans before the PCIJ,

1 2

3 4

Zuk Claim (1958). Crane v Austria (US v Austria); see also Tripartite Claims Commission Administrative Decisions Nos. 1 and 2 (1927). Eisner v United States (1954). Serbian Loans Case (France v Serbia); Brazilian Loans Case (France v Brazil); E. Martens, ‘Norwegian Loans Case’, in EPIL, vol. 2, 210; C. Von Katte, ‘Brazilian Loans Case’, in EPIL, ´tats bre´silien et serbe devant la Cour 39–40; A. Prudhomme, ‘Les Emprunts d’E Permanente de Justice Internationale de la Haye’, JDI, 56 (1929), 837–95; R. Genet, ‘L’Affaire des emprunts serbes et bre´siliens devant la Cour Permanente de Justice Internationale et les principes du droit international’, RGDIP, 36 (1928), 669–94; V. Go ¨tz, ‘Serbian Loan Case’, in EPIL 256–58; Norwegian Loans Case, Judgment, 6 July 1957, ICJ Rep (1957), 9–95. On the continued relevance of the Serbian Loans Case, see T. Wa ¨lde, ‘The Serbian Loans Case: a precedent for investment treaty protection of

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and then turns to the Norwegian Loans Case. The latter is the only sovereign debt case to come before the ICJ. One reason why only three cases on sovereign debt have reached the World Court is that sovereign debt disputes are seen to be of a commercial, private law character, as opposed to the classical public international law cases typically before the court.

A. The ‘Serbian Loans’ and ‘Brazilian Loans Cases’ The facts in the Serbian Loans and the Brazilian Loans Cases are almost identical. In the first half of the twentieth century, it was common to use the term ‘loans’ interchangeably for both ‘loans’ and ‘bonds’. In modern parlance, the cases would be called Serbian, Brazilian and Norwegian Bonds Cases. The French government espoused private bondholder claims for repayment of Serbian loans in gold, rather than in highly devalued French currency. When France devalued the franc in the wake of World War I as against gold, bondholders protested vigorously against continued payment in paper-francs. They lobbied the French government. After some initial hesitation, France decided to protect its bondholders diplomatically vis-a`-vis the Brazilian and Serbian governments. When diplomatic negotiations failed, France and Serbia brought the Serbian Loans Case to the PCIJ under a special agreement signed in Paris on 18 April 1929. Similarly, France and Brazil submitted their dispute to the PCIJ by means of a special agreement concluded in Rio de Janeiro on 27 August 1927. Even admitting that both cases involved solely questions of municipal law, the PCIJ could decide disputes arising purely under municipal law provided the parties submit to its jurisdiction by special agreement. The essential question before the court was whether payment in gold or French legal tender was due. The two cases focused on the interpretation of the gold clauses contained in the Serbian and Brazilian loans governed by municipal law. Gold clauses were the most venerable protective device against currency depreciations and devaluations. Nowadays, currency boards and exchange rate pegs pursue a similar objective. They are a common means of fixing the value of inflation-prone currencies to a stable anchor currency, such as the US dollar or the euro. foreign debt?’, in T. Weiler (ed.), International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law (London: Cameron, May 2005), 383–424.


61

The abolition of the gold standard and gold clauses shifted government lending to being denominated in a few anchor currencies. A modern commitment device is Argentina’s currency board with the US dollar established in the early 1990s.5 From a legal perspective, a significant difference between the commitment to the fixed exchange rate via a currency board and gold clauses is that the former are generally not incorporated into sovereign lending instruments. In the absence of stabilisation clauses in the contract or BIT, designed to grant legally enforceable rights, creditors have no claim in damages in case the government modifies its currency regime. By reference to gold, the monetary authority established a definite value for the currency of payment in the late nineteenth and early twentieth centuries. In this way, gold clauses in sovereign lending instruments, and even in many other contracts between private parties, provided a monetary anchor for claims to money. Gold clauses protect the debt’s substance and isolate debt instruments from the vagaries of monetary and exchange rate policies, including random and engineered currency fluctuations. Their prominence in sovereign lending before World War II gave rise to many problems of interpretation.6 The Brazilian Loans Case involved three loans with somewhat differently formulated gold clauses. The gold clause in the 1909 loan referred only to interest ‘payable in gold’. The 1910 and 1911 loans covered both interest and principal. During 1909–11, Brazil issued three loans to finance its ports and railways. The 1909 loan was for the amelioration of the port of Recife in the amount of 40 million francs, payable with 5 per cent interest biannually in gold in Paris, Rio, London, Antwerp, Amsterdam and Hamburg. The 1910 loan of 100 million francs was to finance railway construction in Goias, payable with 4 per cent interest in Rio, Paris and London. The third, 60 million loan in 1911 was for railway construction in Bahia, payable with 4 per cent interest in Rio, London and Paris. 5 6

Argentina’s convertibility law, Law No. 23,928, 27 March 1991. A. Plesch, The Gold Clause (London: Stevens & Sons, 1936) distinguishes (1) gold clauses proper, (2) gold coin clauses, and (3) gold value clauses; A. Schoo, La Clausula Oro: Las Obligaciones a Oro Ante la Ley, la Doctrina y la Jurisprudencia; el Derecho Comparado (Buenos Aires: Bernabe, 1937); A. K. Kuhn, ‘The gold clause in international loans’, AJIL, 28 (1934), 312–15; M. Domke, ‘Des Emprunts d’e´tats libelle´s en dollars-or’, JDI, 63 (1937), 547–59; M. Domke, La Clause ‘dollar-or’: la non-application de la le´gislation ame´ricaine aux emprunts ´ditions Internationales, 1935). internationaux (Paris: Les E

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Between 1895 and 1913, Serbia issued several loans in France with an aggregate principal of over 1 billion French francs with different gold clauses (‘payable en or’ and ‘francs-or’). These loans served in large part to refinance older debt. Until 1924, Serbia invariably paid in French francs. Thereafter, creditors instead claimed payment in gold. Prior to and during World War I, the French franc was on the gold standard. The conclusion of peace treaties led to an appreciation of the franc. Only in 1924 when the French franc was devalued to roughly one-fifth of its value with respect to 1914 did bondholders refuse payment in francs. The PCIJ asserted jurisdiction over state-sponsored and essentially contractual claims governed originally by municipal law on two conditions: (1) that the country of nationality exercise diplomatic protection, and (2) that the PCIJ would have jurisdiction over a hypothetical state-tostate claim of the same character. The two cases raised the question whether default on bonds governed by national law gave rise to a ‘dispute of an international character’.7 Access to the court by individual bondholders was conditional on support by their respective governments. This requirement was the result of the constraint limiting the PCIJ’s jurisdiction to legal disputes between states. Under this ruling by an international court, the country of nationality maintains functional control over sovereign bond claims at all times. Importantly, however, the court did not see fundamental obstacles to jurisdiction over debt instruments governed by municipal law. Relying on the principle of nominalism, Brazil and Serbia maintained that only payment in paper-francs was due under the applicable Article 1895 of the French Code Civil.8 That part of French civil law the PCIJ did not apply on tenuous grounds. It found twice for France. Majorities of 9:2 and 9:3 respectively construed the gold clauses in the loans as gold value clauses unaffected by the French suspension of gold clauses.

7

8

Serbian Loans Case, 17–20; Brazilian Loans Case, 101; Vagts, ‘International economic law and the American Journal of International Law’, AJIL, 100 (2006), 769–82, 776. Article 1895 Code Civil provides that: ‘L’obligation qui re´sulte d’un preˆt en argent n’est toujours que la somme nume´rique eńonceé au contrat. S’il y a eu augmentation ou diminution d’espe`ces avant l’e´poque du paiement, le de´biteur doit rendre la somme nume´rique preˆteé, et ne doit rendre que cette somme dans les espe`ces ayant cours au moment de paiement.’


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In the Brazilian Loans Case, the two Latin American judges on the court, Brazilian Judge Pessoa and Cuban Judge De Bustamante, dissented. Their dissent maintained that the court lacked jurisdiction over disputes of municipal law as a matter of principle. Likewise, Judges Bustamante and Pessoa, alongside the Yugoslav ad hoc Judge Novacovich, dissented in the Serbian Loans Case. Both judgments established a crucial distinction between the proper law of contract applicable to the currency of payment (lex monetae) and the proper law applicable to the substance of the debt. In this context, the court affirmed the famous principle that every contract between a state and a foreign national must be governed by some municipal law: ‘Any contract which is not a contract between States in their capacity as subjects of international law is based on the municipal law of some country.’9 Private international law, as part of municipal law, determines the applicable law. To determine the applicable law, the court had recourse to the nature of loan obligations and the circumstances at issuance, as well as the common intention of the parties. An international court or tribunal was bound to rely on the jurisprudence of national courts to interpret domestic law: ‘For the Court itself to undertake its own construction of municipal law, leaving on one side existing judicial decisions, with the ensuing danger of contradicting the construction which has been placed on such law by the highest national Tribunals . . . would not be in conformity with the task for which the Court has been established and would not be compatible with the principles governing the selection of its members.’10 As far as the creation, the substance, and the validity of the debt were concerned, the court found that it could not presume that Brazil and Serbia desired to submit to a foreign law.11 The law governing the substance, the court observed, must necessarily be the same for all bondholders, whereas their identity and the place of purchase were irrelevant. However, the law applicable to payment was French law, given French monetary sovereignty over French francs, the currency of denomination. Crucially, the court split the applicable law. Severable parts of the contract could be governed by different municipal laws: ‘the same law may not govern all aspects of the obligation. The distinction which seems indicated for the purposes of this case is more particularly that 9

Serbian Loans Case, 41.

10

Ibid., 46.

11

Brazilian Loans Case, 121.

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between the substance of the debt and certain methods of payment thereof, subject to any law other than its own.’12 The law applicable to the payment clause, in the court’s view, was entirely separate from the question of substance and validity of the debt. This differentiation is problematic, especially because the PCIJ applied French law selectively. In applying French law, the court relied on the longstanding principle of international monetary law that a state is entitled to regulate its own currency.13 Brazilian or Serbian law, which the court itself had identified as the principal applicable law, governed the substance of the debt. Curiously, the court did not in fact apply the debtor country’s law. It applied French law in a selective way, limiting the scope of the French public policy prohibition of gold clauses to just internal contracts. Thereby, it refused to allow considerations of public policy to override the application of a foreign municipal law. The PCIJ applied an autonomous pacta sunt servanda rule, without substantive recourse to either French or Serbian (or Brazilian) municipal law.14 The PCIJ neutralised the French abolition of gold clauses for international contracts. The court found that the debtor governments had accepted an express gold clause, as required by French law. These clauses protected holders against every form of devaluation. The Brazilian and Serbian construction, France argued, ran contrary to the Cour de Cassation’s longstanding case law. Its jurisprudence established that the suspension of gold clauses applied solely to domestic transactions. International contracts, even where France was the place of payment, were outside the abolition’s reach for reasons of domestic monetary stability. But neither France in its submission, nor the court in its judgments, gave a convincing explanation as to why a general regulatory measure adopted to safeguard financial stability ought to apply only to domestic transactions. Invalidating gold clauses only in domestic French francs-denominated contracts was discriminatory. In both cases, the PCIJ refused to interpret French law autonomously, and followed ‘reasonable’ case law of the Cour de Cassation. Interpreting public policy in French law would be a ‘most delicate matter’. The court solely observed that ‘according to the information furnished by the Parties, the doctrine of French courts, after some oscillation, has now been established . . . consequently there is nothing to prevent the 12

Serbian Loans Case, 41.

13

Ibid., 44.

14

Wa ¨lde, ‘The Serbian Loans Case’, 399.


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creditor from claiming in France . . . the gold value stipulated for’.15 The PCIJ held that while gold clauses in municipal contracts were null and void, they remained valid in international contracts.16 Serbia and Brazil were required to pay in gold.17 One commentator noted with approval: ´tat e´tranger ou une Socie´te´ ayant son sie`ge Il n’est pas douteux que quand un E social ou son exploitation a` l’e´tranger e´met un emprunt en France et stipule qu’ils paieront les inte´reˆts et rembourseront les sommes preˆteés a` Paris, cette ope´ration rentre dans la cate´gorie des contrats internationaux, puisqu’elle comporte une exportation des deniers preˆte´s et une importation des sommes nećessaires aux services des inte´reˆts et a` l’amortissement de la dette. De`s lors, si l’emprunteur s’est engage´ a` payer ses preˆteurs en une monnaie équivalente a` ` son compte l’e´ventualite´ de la perte au change de la monnaie l’or ou a` prendre a française, cette stipulation est valable et le de´biteur ne peut pas se pre´valoir du cours force´ pour refuser de l’exećuter.18

It is doubtful whether this view is correct. The wording of Article 1895 Code Civil is not limited to internal contracts. It applies without discrimination to all contracts governed by French law. Judge Pessoa, in dissent, applied French law as the lex contractus, and found that Article 1895 applies without distinction to internal and international contracts. The correct view is that Article 1895 adjusts payment obligations subject to French municipal law generally, if the French monetary authority adjusts the specie content of legal tender. After having limited the scope of the French prohibition on gold clauses, the court found that ‘the bonds show that in each case there was a promise to pay in gold or gold francs’.19 Relying on the rule that each term ought to be given effect, the court gave effect to the definitive use of the word ‘gold’ in the form of a gold value clause.20 The key passage provides: It is conceded that it was the intention of the Parties to guard against the fluctuation of the Serb dinar, and that, in order to procure the loans, it was necessary to contract for repayment in foreign money. But, in so contracting, the Parties were not content to use simply the word ‘franc’ or to contract for payment in French francs, but stipulated for ‘gold francs’. It is quite unreasonable to suppose that they were intent on providing for the giving in payment of mere gold specie, or gold coins, without reference to a standard of value. The treatment of the gold clause as indicating a mere modality of payment, without 15 18 19

16 17 Serbian Loans Case, 46–47. Ibid., 41. Brazilian Loans, 118–119. H. Capitant, ‘Les Emprunts internationaux et le cours force´’, JDI, 55 (1928), 561–65, 561. 20 Serbian Loans Case, 29. Ibid., 30.

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reference to a gold standard of value, would be, not to construe but to destroy it . . . [as] there were no gold coins for such amounts. It is manifest that the Parties, in providing for gold payments, were referring, not to payment in gold coins, but to gold as standard of value.21

In the absence of international gold francs, the court declared that the gold clause referred to French money. This pronouncement is remarkable given that the French monetary unit at the time of the judgment was silver.22 In the Brazilian Loans Case, the court similarly applied the rule that meaning should be given to all terms of a contract. It showed that the term ‘gold francs’ must mean something more than the simple term ‘francs’.23 In conjunction with the contra proferentem rule for ambiguous terms,24 the court ruled that all bonds in question provided for the payment of principal and interest in gold:25 ‘When the Brazilian government promised to pay “gold francs”, the reference to a well-known standard of value cannot be considered as inserted merely for literary effect, or as routine expression without significance. The Court is called upon to construe the promise, not to ignore it.’26 Serbia and Brazil also pleaded economic necessity ( force majeure), whose purported effect was to excuse default on their loans. The PCIJ disagreed. The court unequivocally pronounced that the great economic dislocations caused by World War I in no way affected the legal obligations of the debtor governments to repay their outstanding indebtedness. Mere increases in debt repayment obligations due to unforeseen macroeconomic conditions could not excuse Serbian and Brazilian nonpayment of their debt obligations.27 In the Brazilian Loans Case, the court dismissed the plea of necessity and force majeure. It explained that the economic dislocation caused by the war had not, ‘in legal principle’ relieved Brazil of its pecuniary obligations.28 Gold payments were not impossible: ‘There is no impossibility because of inability to obtain gold coins, if the promise be regarded as one for the payment of gold value.’ Debtors, including governments, could always obtain the equivalent in gold value. Undoubtedly, this statement cannot be maintained without exceptions. Governments faced with rapidly dwindling foreign reserves do at some 21 22

23 26

Ibid., 32–33. A. Fachiri, ‘Judgment No. 14, Delivered 12 July 1929. The Serbian Loans Case’, BYBIL, 11 (1930), 203–08. 24 25 Serbian Loans Case, 32. Brazilian Loans Case, 114. Ibid., 114–15. 27 28 Ibid., 116. Serbian Loans Case, 4. Brazilian Loans Case, 120.


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point become unable to procure enough hard currency or gold to discharge all the country’s external debt. In Serbian Loans, the court further observed that it ‘cannot be maintained that the war itself, despite its grave economic consequences, affected the legal obligations of the contracts between the Serbian government and the French bondholders. The economic dislocations caused by the war did not release the debtor state, although they may present equities which doubtlessly will receive appropriate consideration in the negotiations and – if resorted to – the arbitral determination for which Article II of the Special Agreement provides.’29 By sidestepping many of the complications which arise in applying necessity in the economic context, the court neutralised the last legal defence for debtor governments. Serbia and Brazil also put forward the doctrine of rebus sic stantibus. According to this argument, the gold standard ought not to govern the payments under the bonds, since the rapid depreciation of the French currency was neither foreseen nor foreseeable at the time of issuance. In dismissing this contention in Serbian Loans, the court noted that protection against unforeseen changes in the value of currencies was precisely the essential objective of gold clauses, which the parties explicitly included in the loan.30 The court dismissed the further Brazilian contention that the depreciation of the French currency could not trigger the gold clauses, because they solely safeguarded bondholders against any depreciation of the debtor country’s currency.31 Brazil maintained that the ‘devalorisation of the French franc could not in fact increase the obligations of the latter: the gold clause merely prevents the borrower from availing itself of a possibility of discharge of the debt in depreciated currency’.32 The court disagreed with this argument, and explained that the ‘depreciation in value . . . was the object of the safeguard, not in this or that particular currency . . . [F]or this reason . . . reference was made to the well-known stability of the gold standard.’33 Serbia and Brazil also relied on estoppel, as bondholders accepted depreciated paper-francs for a number of years after 1919. In Serbian Loans, the court explained that the principle of estoppel was only useful to the extent that the parties, by their conduct, had altered or 29 31 32

30 Serbian Loans Case, 29–31. Ibid., 34. See the finding in the Young Loan Arbitration examined at section D below. 33 Brazilian Loans Case, 117. Ibid.

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impaired their rights. However, estoppel could not be used to clarify the terms of the loan. Examining the facts of the case, the court found no sufficient basis for estoppel, ‘no clear and unequivocal representation by the bondholders upon which the debtor State was entitled to rely and has relied’.34 Similarly, in Brazilian Loans, the court found ‘no adequate basis for an inference from the conduct of bondholders that they were of opinion that they were not entitled to obtain payment on the basis of the gold standard’.35 Interestingly, the compromis between Serbia and France did not vest jurisdiction in the PCIJ to settle the currency of payment. Its Article II required subsequent diplomatic negotiations to arrive at an equitable solution.36 Equity would either require concessions to bondholders or taking Serbia’s payment capacity into account. If these direct negotiations between France and Serbia on the currency of payment should fail, the compromis provided for settlement by a special arbitral tribunal.

B. The ‘Norwegian Loans Case’ In the Norwegian Loans Case, France exercised diplomatic protection on behalf of bondholders who bought Norwegian government bonds between 1925 and 1955.37 Over the period 1885 to 1909, the Norwegian government, in conjunction with two state-owned banks, had issued a number of international loans (bonds). The government suspended payments in gold in 1923. Previously, France had proposed to submit the question to a mixed commission or to arbitration. Like Serbian Loans and Brazilian Loans, the central question in this dispute between France and Norway was whether payment was due in gold or in kroner banknotes. Yet, the Norwegian loan dispute never reached the merits stage for lack of jurisdiction. 34 36

37

35 Serbian Loans Case, 38. Brazilian Loans Case, 24. Serbian Loans Case, 15–16. Wa ¨lde, ‘The Serbian Loans Case’ 401, highlights this often overlooked aspect of the case. Norwegian Loans Case (France v Norway); L. Orcasitas Llorente, ‘Sentencia del Tribunal Internacional de Justicia de la Haya de 6 de julio de 1957 sobre ciertos empre´stitos noruegos en el mercado france´s’, REDI, 10 (1957), 467–79; E. Martens, ‘Norwegian Loans Case’, in EPIL vol. 2 (1982). K. Wellens, Economic Conflicts and Disputes Before the World Court (1922–1995): A Functional Analysis (The Hague: Kluwer Law International, 1996), 67 (the ICJ either incapable or unwilling to deal with economic disputes); J. Herbst, ‘Norwegian Loans Case’, in MPEPIL (2009).


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The French government, relying on various gold clauses in the loans, requested repayment of interest and principal in gold.38 France first argued that Norway was obligated to pay foreign bondholders of the same issue without discrimination according to nationality. By preferentially paying Danish and Swedish bondholders, Norway had breached international law. Moreover, debtor countries could not modify external debt instruments unilaterally without prior negotiation with bondholders or their state of nationality, or without recourse to arbitration on the debtor country’s payment capacity.39 France’s second main argument was that international law granted special protection to international loans. International loans displayed one of the following four characteristics: (1) marketed abroad, (2) expressed in several currencies, (3) payable abroad, and (4) expressed in several languages. Norway committed a breach of international law by abrogating in 1923 the gold clause in its bonds by general currency legislation. This Norwegian law of 15 December 1923 permitted the discharge of kroner debts expressed in gold by Norwegian banknotes at their nominal gold value. If creditors refused payment, the debtor could request a postponement. In challenging Norway’s currency legislation, France relied on several mixed commission cases and an alleged rule of customary international law which forbade states to enact extraterritorial legislation affecting contractual rights of non-resident aliens. It also posited that its claim was international, since it amounted to ‘a recovery of contract debts’ under Article I of the Second Hague Convention of 1907. Norway countered that its bonds were governed solely by Norwegian law. As such, they were not covered by the parties’ optional declarations. France had limited its consent to the court’s jurisdiction to disputes involving international law, as determined by its government on an ad hoc basis: ‘This declaration does not apply to differences relating to matters which are essentially within the national jurisdiction as understood by the Government of the French Republic.’40 The loans at issue amounted to more than mere obligations under domestic law, France argued. Their recovery by means of diplomatic protection against the Norwegian debtor state on behalf of French holders was an international legal dispute of the first degree, subject to the court’s jurisdiction. In support of this contention, France also

38

Norwegian Loans Case, 13.

39

Ibid., 15.

40

Ibid., 9.

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submitted that the loans were floated and payable abroad and issued in various currencies and several languages. A 12:3 majority declined jurisdiction41 by reciprocal application of the French, Connally-type reservation:42 ‘Norway, equally with France, is entitled to except from the compulsory jurisdiction of the Court disputes understood by Norway to be essentially within its national jurisdiction.’43 Norway could rely on the French limitation because it had accepted the ICJ’s jurisdiction only on the basis of reciprocity.44 The ICJ found that the bonds, governed as they were by Norwegian law, were within the domain of municipal law and thereby outside its purview. Moreover, the facts of the case arose prior to French acceptance of the court’s jurisdiction. France’s appeal to the Hague Convention also failed. The court interpreted this international agreement in a far more limited sense than the French government. The Convention did not aim ‘to introduce compulsory arbitration in the limited field to which it relates . . . only [the] obligation [that] . . . [a State] must not have recourse to force before it has tried arbitration’.45 Judge Quintana concurred, but added that the finding of lack of jurisdiction was based solely on the matter falling squarely within the sphere of municipal law: ‘State loans, as being acts of sovereignty, are governed by municipal law.’46 By contrast, Judge Basdevant, who acted as counsel for France in both Serbian Loans and Brazilian Loans, opined that they fell within the purview of international law.47

Dissent by Judge Read Judge Read, in dissent, regretted that the court did not proceed to the merits of the case. The French exercise of diplomatic protection in no way changed the character of the bondholder claims. While it did elevate them from the national to the international plane, the gold clause itself, as a matter of contract, continued to be governed exclusively by Norwegian law. The ICJ did, however, possess jurisdiction to examine violations

41 42

43 44

45

Ibid., 27. ‘A self-judging clause seeks to preserve the prerogative of determining jurisdiction to the declarant State’: see C. Stahn, ‘Connally Reservation’, in MPEPIL, December 2006. Ibid., 24. J. Gold, J. Evensen and J. Keun Oh, Legal and Institutional Aspects of the International Monetary System: Selected Essays (Washington, DC: International Monetary Fund, 1979), 454. 46 47 Norwegian Loans Case, 24. Ibid., 28. Ibid., 78.


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of international law due to impairment of acquired rights, notwithstanding exclusive competence of Norwegian municipal courts under the contract. Preferential payments to Danish and Swedish bondholders rendered the Norwegian position inconsistent. Their bonds contained a real gold clause. Norway contended that these were merely ex gratia payments. Also, because Norway relied on necessity to justify its extraterritorial legislation, the matter was, in his view, one of international law: ‘insuperable difficulty [exists] in reaching the conclusion that a case involving these issues can be treated as being solely one of national law’.48 Norway could be liable because of differential creditor treatment. Norway also submitted that the two state-owned borrowing banks possessed legal personality distinct from the Norwegian state and that bondholders failed to exhaust local remedies. France claimed there was no need to exhaust local remedies as such remedies were in all likelihood going to be ineffectual. On distinct legal personality, Judge Read first noted that the records showed a lawsuit by bondholders in a French court. There, the bank objected to the court’s jurisdiction on the grounds that it was a Norwegian instrumentality. Now, the bank was stopped from invoking its distinct legal personality as bar to possible liability. Norway had to be held to its prior argument, said Judge Read. It thus appears that the Norwegian State completely identified itself with the Bank for the purpose of preventing the bondholder from obtaining a judicial determination of his rights. It is a sound doctrine that a party cannot blow both hot and cold at the same time, and Norway cannot retreat from the position of complete identification taken in 1931.49

In dismissing the requirement of exhausting local remedies, Judge Read explained that municipal lawsuits would have been futile for bondholders. They would have ‘met an insuperable barrier in the law of 1923. It would have been in vain for them to have argued that the enactment of that law was contrary to the rules of international law.’50 Of particular interest is Judge Read’s obiter dictum about whether the present ‘sort of universal bankruptcy’ could preclude international liability. Yet, such justification of the Norwegian law suspending payments in gold, Judge Read posited, required as a corollary ‘equal treatment to all creditors involved’.51 Norway had denied the existence of a rule of international law requiring equality of treatment. 48

Ibid., 90–91.

49

Ibid., 90–91.

50

Ibid., 98.

51

Ibid., 78.

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Dissent by Judge Lauterpacht In a powerful dissent, Judge Hersch Lauterpacht maintained that France’s acceptance of the ICJ’s jurisdiction was invalid as a whole52 for being inconsistent with Article 36(6) of the ICJ Statute. He denied that the French ‘acceptance’ constituted a legal instrument: An instrument in which a party is entitled to determine the existence of its obligations is not a valid and enforceable legal instrument of which a court of law can take cognizance. It is not a legal instrument. It is a declaration of a political principle and purpose. [According to a general principle of law] ‘contracts and other legal instruments’ were invalid whenever the object of the obligation is reserved for the exclusive determination of the party said to be bound by the obligation in question. Instruments . . . cognizable before a court of law and relied upon for obtaining redress must be instruments creating legal obligations.53

In addition, Judge Lauterpacht disagreed that the dispute concerned solely Norwegian law. Even though interpretation of the loan was primarily a question of national law, it was not exclusively so. While Norwegian courts had to decide what the debtor promised to pay, the ICJ possessed jurisdiction on whether Norwegian legislation violated international law. In the Serbian Loans and Brazilian Loans Cases, the Permanent Court held that: an ‘international’ contract must be subject to some national law . . . does not mean that that national law is a matter which is wholly outside the orbit of international law. National legislation – including currency legislation – may be contrary, in its intentions or effects, to the international obligations of the State. The question of conformity of national legislation with international law is a matter of international law. The notion that if a matter is governed by national law it is for that reason at the same time outside the sphere of international law is both novel and, if accepted, subversive of international law. It is not enough for a State to bring a matter under the protective umbrella of its legislation, possibly of a predatory character, in order to shelter it effectively from any control by international law. There may be little difference between a Government breaking unlawfully a contract with an alien and a Government causing legislation to be enacted which makes it impossible for it to comply with the contract . . . The dispute now before the Court, although it is connected with the application of Norwegian law, is also a dispute involving international law. It is possible to find that if the Court had jurisdiction on the merits it would find that Norway has not violated any rule of international law by declining to repay the bonds in gold. However, in finding that, the Court would apply international law.54 52

Ibid., 50.

53

Ibid., 49.

54

Ibid., 37.


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Judge Lauterpacht regarded the dispute as one concerning international law, despite the fact that Norwegian law was the lex contractus. The last two sentences are also instructive. Judge Lauterpacht explicitly left open the question of liability. The case, in Judge Lauterpacht’s view, raised four important substantive questions of international law. First, whether the Norwegian legislation violated ‘property rights’ of aliens derived from international loans.55 Second, whether Norway discriminated between resident aliens and aliens abroad. Third, whether Norway discriminated between bondholders by nationality. Fourth, whether bondholders needed to exhaust local remedies. He found the Norwegian objections to jurisdiction justified only for failure to exhaust local remedies, highlighting that: in matter of currency and international loans the decisions of courts of various countries . . . have not been characterised by such a pronounced degree of uniformity and certainty as to permit a forecast, with full assurance, of the result of an action in Norwegian courts. Thus an attempt ought to have been made to exhaust them.56

In any event, recourse to the ICJ would have been available in the event of a decision adverse to bondholders. It is regrettable for the development of international law on sovereign debt that the case never reached the merits stage. Judges Read and Lauterpacht correctly voted to uphold the ICJ’s jurisdiction. The Norwegian Loans Case did involve important questions of international law. Precisely for that reason the case also had the potential to lay down important principles concerning the impairment of sovereign debt obligations by general currency legislation.

C. The ‘Canevaro Brothers Case’ The central dispute in Canevaro Brothers was whether repayment on defaulted bonds (libramientos) in the amount of £77,000 (£91 million, £8 million) issued by Peruvian decree under the Pie´rola dictatorship in 1880 was due in gold or in paper money.57 Peru paid £35,000 in 1885. 55

56 57

For whether international debt instruments amount to property or acquired rights, see ch.9 below. Norwegian Loans Case, separate opinion of Judge Lauterpacht, 39. Canevaro Brothers Case (Italy v Peru); G. Watrin, Essai de construction d’un contentieux international dettes publiques (Paris: Librairie du Receuil Sirey, 1929), 189–91; J. Kohler, ‘Die

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Two Peruvian laws in 1886 and 1889 restructured Peru’s domestic debt. The debt in question was created and payable in Lima, though denominated in sterling. Article 14 of the 1889 law reserved more favourable treatment to those debts recognised as legitimate by the democratic government. During the period of the Peruvian default, the Canevaro investment house underwent significant changes. In 1885, upon the death of the original founder, it was reconstituted as a Peruvian company. In 1890, that company was dissolved entirely and the Peruvian bonds passed into the hands of the three Canevaro brothers. One of these brothers was a Peruvian national, while the other two were Italian citizens. The tribunal simply noted that the restructuring had apparently become necessary due to the disastrous state of Peru’s financial affairs brought about by the war with Chile and its own civil war. However, the tribunal seemed to take the view that it lacked jurisdiction to judge these Peruvian restructuring measures. These, it observed, undoubtedly imposed a harsh burden on Peru’s creditors. The tribunal emphasised that the Canevaro claims were clearly internal debt, which the government was free to regulate as it saw fit. In 1890, the Canevaro brothers attempted to carve out preferential treatment for their debt. Counterfactually, they relied on the proposition that their investment house provided funds to aid the Peruvian war effort. As a result, they would fall outside the scope of the 1889 law restructuring the domestic debt. The Peruvian government had conceded that the 1886 law did not affect the validity or the amount of the Canevaro claim. Drawing an implicit analogy to insolvency law, the tribunal highlighted that the Canevaro brothers only now sought to take advantage of a more favourable treatment instead of accepting equal treatment with all other creditors. At a later stage in its award, the tribunal explicitly remarked that it could not in fact examine whether Peru could validly impose the sacrifices of the 1889 law on foreign nationals. The general terms and the spirit of the 1889 law precluded such examination. The tribunal paid deference to the Peruvian Congress, which had attempted to resolve Peru’s financial distress by means of a sovereign debt restructuring.

Lehren des Canevarofalles’, Zeitschrift fu ¨r Vo¨lkerrecht, 8 (1913), 1; E. Zitelmann, Der Canevaro-Streitfall: Schiedsspruch vom 3. Mai 1912 auf Grund des Schiedsvergleichs vom 25. April 1910 (Munich: Leipzig Duncker & Humblot, 1914); W. Benedek, ‘Canevaro Claim Arbitration’, in EPIL, vol. 2.


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Creditors presenting claims later could not simply obtain preferential treatment and thereby unravel the restructuring. The tribunal disapproved of this attempt to obtain preferential treatment in financial distress and found that the Canevaro claim fell clearly under Article 1, paragraph 4 of the 1889 law, which covered all sorts of debts contracted prior to January 1880 under the dictatorship. However, this finding of the tribunal was treading on tenuous ground, since the Canevaro claim arose only in December 1880. In an extensive interpretation, the tribunal gave priority to the overriding objective of the 1889 law, namely, to restructure all debts contracted by dictator Pie´rola. The tribunal also examined whether the nationality of the creditor barred the claim. On this point, the tribunal concluded that the claim was only subsequently assigned to non-Peruvian (Italian) nationals. They acquired internal debt, and stood in the shoes of the initial holder. It was passed on as it had originally existed. Consequently, and so long as the Peruvian measures were not discriminatory, it was unnecessary to decide whether such heavy sacrifices could validly have been imposed on foreign nationals. The tribunal obliged Peru to pay only under the terms of the 1889 law. It pointed out that it was not asked to examine Peru’s responsibility under other headings or to assess whether Peru’s financial distress could excuse its default on its private debt. Compensation was fixed at the level of the claim in 1889: £43,000 (£44 million, £4.5 million) in capital and £16,500 (£17 million, £1.7 million) in interest. However, Peru was not bound to pay actual compensation in sterling. As prescribed by the 1889 law, payment in Peruvian internal bonds carrying 1 per cent interest issued specifically for the 1889 restructuring discharged the Canevaro claim. Only interest accruing on that debt was to be effected in sterling. The tribunal allowed great leeway to the Peruvian executive in carrying out that country’s sovereign debt restructuring.

D. The ‘Young Loan Arbitration’ The Bank for International Settlements (BIS) and the Young Loan replaced the system for German war reparations under the Versailles Treaty.58 Article 55 of the BIS Statute provides that the BIS cannot be 58

M. O. Hudson, ‘The Bank for International Settlements’, AJIL, 24 (1930), 561.

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liquidated ‘before it has discharged all the obligations which it has assumed under the Plan’. But its purposes are stated in general terms (‘to act as trustee or agent in regard to international financial settlements’), without particular reference to ensuring service on the Young Loan. The Hague Agreement of 20 January 1930 that finally settled German reparations required Germany to deliver a debt certificate to the BIS as trustee, to pay the scheduled annuities under the Young Loan till 1988 and to assign certain revenue sources to its service.59 To be able to fulfil its function as clearing house for central banks and act as agent or trustee for financial settlements, the BIS benefits from a broad immunity for its property, assets and any funds entrusted to it. In the Young Loan Arbitration, a narrow 4:3 majority of arbitrators held that the least depreciated currency clause in the German Young Loan did not protect bondholders against appreciations of the Deutschmark.60 Two revaluations of the German currency in 1961 and 1969 gave rise to a dispute on the amount due under the Young Loan of 1930. Article 28 of the London Debt Agreement (LDA) of 1953 on German External Debt61 provided for the establishment of an arbitral tribunal. This tribunal was to enjoy exclusive jurisdiction on disputes arising between the parties in the application and implementation of the LDA. The factual origin of the dispute was that each of the currencies in which the Young Loan had been issued had undergone substantial reductions in value since 1930. The objective behind the loan’s Multiple Currency Exchange Guarantee was to give identical rights to all of the Young Loan bondholders in all circumstances. The parties looked for another

59 60

61

Agreements on Reparations, 20 January 1930, AJIL 24 (1930), 259–348, 262. Young Loan Arbitration; W. A. Kewening, ‘Young Plans Loans Arbitration’, in EPIL, 296–98; F. Gianviti, ‘Garantie de change et reévaluation mone´taire: l’affaire de l’emprunt Young ´rieures allemandes)’, (Sentence du 16 mai 1980 du Tribunal d’arbitrage des dettes exte AFDI, 26 (1980), 250–73; H. J. Hahn and P. Behrens, Die Wertsicherung der Young-Anleihe: das Urteil des Schiedsgerichtshofs fu ¨r das Abkommen u ¨ber deutsche Auslandsschulden vom 16. Mai ¨ bingen: Mohr, 1984); H. J. Hahn, ‘Value maintenance in the 1980: Text und Kommentare (Tu Young Loan Arbitration: history and analysis’, NYIL, 14 (1983), 3–39. Agreement on German External Debt, London; Tripartite Commission for German Debts, Accord sur les dettes exte´rieures allemandes: projet final du 16 fe´vrier, 1953 (London: 1953); H. Coing, ‘London Agreement on German External Debt’, in EPIL, 364–76; R. A. Morales, The German Debt Settlement of 1953: Some Guidelines for the Current Debt Crisis (Dordrecht: Martinus Nijhoff, 1995); J. L. Simpson, ‘The Agreement on German External Debts’, ICLQ , 6 (1957), 472–86; H. Abs, Entscheidungen:1949–1953: die Entstehung des Londoner Schuldenabkommens (Mainz: Hase & Koehler, 1991).


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type of protective clause as a substitute for the gold clause. They sought protection on a monetary basis other than gold. Germany asserted that the gold clause was invalid in Germany, the United States and some other countries. It proposed that all debts be paid on a nominal basis except that in a state where the gold clause was valid and if that state’s currency had been heavily depreciated a payment might be more than nominal. Creditor representatives disagreed with this position. At the London Debt Conference, the parties substituted the Young Loan’s obsolete gold clause with a Deferred Multiple Currency Exchange Guarantee. Article 2 (e) of Annex I A LDA provides: Should the rates of exchange ruling any of the currencies of issue on 1 August 1952 alter thereafter by 5 per cent or more, the instalments due after that date, while still being made in the currency of the country of issue, shall be calculated on the basis of the least depreciated currency (in relation to the rate of exchange current on 1 August 1952) reconverted into the currency of issue at the rate of exchange current when the payment in question becomes due.

This substitution reflected the underlying evolution of the world’s monetary system, which had moved in the intervening years from the gold standard underpinned by the British pound to a system of fixed exchange rates under the auspices of the Bretton Woods institutions. Devaluations of the French franc by more than 5 per cent, in 1957 and 1958 respectively, first triggered the Multiple Currency Exchange Guarantee. Germany adjusted debt service under the Young Loan accordingly, with the dollar as the least depreciated currency. Next, these revaluations gave rise to a dispute on whether this new protective clause applied also to revaluations of the currency of issue. The Deutschmark was revalued in 1961 and again in 1969.62 In 1971, Belgium, France, Switzerland, the United Kingdom and the United States requested arbitration. Germany objected that the dispute was not between parties to the LDA. It relied on Article 28 (2) LDA that provided in the relevant part for arbitration ‘between two or more of the Parties to the present Agreement or the Annexes thereto’. The obligations agreed upon by the parties to the LDA and those resulting from the acceptance of the exchange offer by the bondholders were distinct. While the bearer bonds did incorporate certain terms of the LDA by reference, they were 62

The first revaluation was by 5 per cent, from the old exchange rate of $US 0.29 ¼ 1 DM. The second revaluation was by 12.8 per cent compared to the exchange rate in 1952.

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separate obligations which conferred no cause of action on applicants.63 As a result, Germany asserted that the government claimants lacked standing. The tribunal dismissed this jurisdictional objection and held that the Applicants’ legal interest in the proper satisfaction of the debts to the bondholders continued with full validity into the future and beyond the time when the new offer had been made and accepted . . . The Applicants’ right to an authoritative interpretation of the clause in dispute . . . is grounded on the bedrock of the considerations which the Applicants gave and the concessions which they made in exchange for the disputed clause . . . The Tribunal in the exercise of its judicial function is obliged to inform them.64

On liability, the central question before the tribunal was the precise meaning of the multicurrency protection clause, specifically the terms ‘least depreciated currency’, ‘Wa¨hrung mit der geringsten Abwertung’ and ‘devise la moins de´precieé’ in Article 2(e) LDA. The arbitral tribunal formulated the essential question thus: Does this phraseology – at least within the period from 1961 to 1969 with which we are now concerned – relate only to devaluation in the strict sense, i.e. to cases where the par value of the currency concerned has been changed as a result of governmental action, or does the clause apply as soon as the currency in question is ‘depreciated’ in relation to another currency of issue owing to the revaluation of the latter?65

The applicants contended that the wording of the Multiple Currency Exchange Guarantee clause covered also appreciations of the currency of issuance. It comprised not only depreciations by governmental act, but also market- and policy-driven fluctuations in the value of the German currency. The tribunal observed that any appreciation automatically implied the depreciation of all other currencies in a broader sense.66 The Federal Republic maintained that since the LDA did not contemplate the possibility of an appreciation of the Deutschmark, the clause served solely as safeguard against devaluations of the German currency. The term ‘least depreciated currency’ could hence not refer to a currency which appreciated relative to its value in August 1951. The protective clause solely applied to depreciations of the currency of issue. Germany buttressed this position by highlighting that the par values between the IMF and the creditor countries remained stable after the appreciation of the Deutschmark. 63

Young Loan Arbitration.

64

Ibid., 89.

65

Ibid., 91.

66

Ibid., 84.


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In line with Article 33 of the VCLT, the tribunal regarded the English, French and German formulation of the Multicurrency Guarantee Clause as equally authoritative.67 The tribunal then had recourse to the objective will of the parties. It concluded that the precise meaning of the English term ‘depreciation’ and the French term ‘de´prećiation’ was uncertain.68 In all likelihood, both terms differed from the meaning of the German word ‘Abwertung’. Faced with the impasse it reached in interpreting the plain meaning of the agreement, the tribunal proceeded to look at the context and the rationale of the London Debt Agreement. Specifically, it looked to Article 13 which provided for par values agreed with the IMF as the primary yardstick for conversion. Consequently, the tribunal rejected the applicants’ plea that the flipside of any currency’s revaluation was the devaluation of another.69 The tribunal reasoned as follows. True, there is no disputing that, e.g., a revaluation of the DM means that a person purchasing these has to spend more sterling or Belgian francs for the same amount in DM than he had to spend before the revaluation. However, since neither the par value of sterling as agreed with the IMF nor that of the Belgian franc is changed through the revaluation of the DM there can be no question of these currencies being depreciated – abgewertet, de´prećieé – in the sense that the disputed clause uses this term. In the IMF system as outlined, the countervalue of both currencies expressed in terms of gold or the US dollar remains unchanged. Similarly unchanged is the purchasing power of these currencies on their home market and the external value of these currencies in relation to all other currencies – with the sole exception of the revalued currency.70

Article 2 would only have been triggered if the par values of the issuing currencies had been adjusted concurrently with the revaluation of the German currency. This interpretation, the tribunal concluded, was also in conformity with Article 8 of the LDA. That provision held Germany to an exceptionally strong equal treatment obligation, with respect to different categories of debt and their currencies, as well as in all other respects. The only exception was differential treatment resulting directly from the provisions of the LDA.71 In the tribunal’s judgment, the interpretation that the clause safeguarded only against formal devaluations was consistent with the object and purpose of the LDA, whose primary purpose was to balance liability for actions during the war with Germany’s actual and foreseeable economic capacity. The tribunal observed that the Multiple Currency 67

Ibid., 92.

68

Ibid., 93–94.

69

Ibid., 97.

70

Ibid., 97.

71

Ibid., 100.

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Exchange Guarantee ‘undoubtedly constitutes an attempt by the contracting parties to find a sensible middle way between the desirable and the possible, as far as they could see it in 1952’.72 The tribunal found additional support for its interpretation in the history of the London Debt Agreement. According to witness statements, none of the drafters had contemplated revaluations of the German currency. The Agreement was hence silent on that eventuality.73 This confirmed the tribunal’s reading that the clause protected solely against the devaluation of the currencies in which the debt instruments were issued. The three dissenting arbitrators contended that the majority’s interpretation violated the fundamental principle of non-discrimination between all creditors.74 In their view, bondholders of the series issued in Deutschmarks enjoyed an unjustifiable advantage to the prejudice of all other creditors. Under their alternative reading of the clause, any ‘alteration’ of the exchange rate exceeding 5 per cent triggered the Multiple Currency Exchange Guarantee, whereas the least depreciated currency became only relevant at the stage of calculating debt service.75

E.

Conciliation

Conciliation of sovereign defaults is a non-binding method of dispute settlement, where a person of known standing develops a reasonable and equitable solution with a view to its ultimate adoption by the parties to the dispute. Conciliation is a stronger form of third-party participation in dispute settlement than either good offices or mediation. In the words of Cassese, the conciliator ‘carefully considers the various factual and legal elements of the dispute and formally proposes the [non-binding] terms of settlement’.76 In Re Imperial Japanese Government, the conciliator von Steyern proposed an equitable settlement on unpaid Japanese bonds.77 Japan and the Association Nationale des Porteurs Français des Valeurs Mobilie`res, acting in conjunction with the French government, submitted the case to conciliation. After highlighting that his mandate did not consist in 72 76

77

73 74 75 Ibid., 103. Ibid., 108–09. Ibid., 113–14. Ibid., 128. A. Cassese, International Law (Oxford University Press, 2005), 280. Cf. also the draft rules for conciliation, ILM, 30 (1991), 299. In Re Imperial Japanese Government 4 Per Cent Loan of 1910 Issued in France – Methods of Resumption of Service (1995); Norwegian Loans (France v Norway), ICJ Pleadings, vol. 1, 633.


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resolving the dispute on strictly legal terms, the conciliator emphasised that his task was a practical and equitable arrangement for bond service and referred several subquestions to outside legal experts, as provided for in Article IV of the Agreement for Conciliation dated 9 February 1954 between Japan and the bondholder association. The conciliator applied Article 18 of the Peace Treaty with Japan, which installed a mechanism for equitable adjustment of debt obligations, since, given current exchange rates, the debtor government would return next to nothing to creditors. That outcome would be ‘inadmissible since one could not render the foreign bondholders responsible for the long interruption [of debt service] . . . or for the severe depreciation of the franc, and still less, the yen’.78 The conciliator examined whether a similar 1910 bond issued in sterling could serve as a useful baseline for repayment, because the two parties referred to it in the draft settlement. The conciliator rejected that contention. The bonds in question did not bear sufficient similarity and connection to the sterling bond, in part because the sterling bonds, unlike the Japanese bonds, had not been restructured. Equity to foreign bondholders demanded nonetheless ‘reasonable revalorization’. Rejecting the contention that the Japanese bonds included a gold clause, the conciliator von Steyern held that payment was due in French francs, revalorized to take equitable account of the yen’s depreciation. He buttressed this conclusion by reference to the Serbian Loans Case. By contrast, the devaluation of the franc with respect to gold was noncompensable – an emanation of currency reform. The equitable quantum due to bondholders was 6,000 francs per 500 francs nominal. Consider for comparison the following quantums originally proposed by the two parties. Under the French proposal, a nominal of 500 francs, revalorised on the basis of the sterling–franc exchange at the time of issuance and the current one, would amount to 20,000 francs. Under the Japanese proposal, calculated on the basis of a conversion from francs into yen, and then converted back into sterling at present exchange rates, compensation due would be 11,000 francs. The conciliator’s equitable quantum was just over half of the Japanese proposal. In US Continental Insurance Company v Japan, the US–Japanese Property Commission79 examined the amount due under the same 60-year 78 79

29 ILR, 4–11, 9. L. Summers and A. Fraleigh, ‘The United States–Japanese Property Commission’, AJIL, 56 (1962), 407–32.

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Imperial Japanese Government Four Percent Loan, which was sequestered during World War II.80 At issue was the non-payment of coupons from May 1942 to November 1950. In 1956, the Japanese Government and the Association Nationale des Porteurs Français des Valeurs Mobilie`res, representing bondholders of the same loan, restructured the loan at twelve times the face value in francs. This bondholder agreement implemented the equitable conciliation undertaken by Conciliator von Steyern. The United States maintained that Japan was obliged under international law to pay as much to US as to French bondholders, and hence was under an obligation to pay twelve times the face value of the coupons in francs. As far as US bondholders were concerned, the Property Commission noted that it was not authorised to decide ex aequo et bono. Article 8 of the Draft Allied Compensation Law specified that ‘the amount of damage to public loans or debentures issued by foreign states . . . which have been subjected to wartime special measures . . . shall be the total of the amount of the principal and the amount of the interest coupons’. Article 17 of the Compensation Law laid down an obligation to repay in foreign currency if so provided in the relevant debt instrument. The Commission rejected the equal treatment claim, and found that the bondholder agreement could not in itself modify the Compensation Law to provide for twelve times the face value of the bonds. The claimant could not simply invoke the bondholder agreement. The Peace Treaty and the Compensation Law alone determined compensation in this case. The Commission hence awarded only the simple face value in francs. This finding would not change even if bondholders were able to show that the benefits of the bondholder agreement applied equally and ipso facto to all bondholders under general international law. In any event, the tribunal doubted that such equal treatment reflected customary international law, since the US agent had not been able to point to a single relevant precedent for a customary norm on equal bondholder treatment. With similar reasoning, the Commission rejected the Japanese contention that the bonds could simply be repaid in yen on the basis of the bondholder agreement.81 This agreement excluded from its scope, inter

80 81

US Continental Insurance Company v Japan (US v Austria). Cf. also Crane v Austria (1925), where the Tripartite Claims Commission upheld bond clauses guaranteeing payment in two or more currencies to protect bondholders against future devaluation.


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alia, those bonds circulating inside Japan. Under this exclusion, Japan would benefit from its own unilateral action which prevented bondholders from exporting their coupons. The Commission again based its decision on the Peace Treaty and the Compensation Law. In City of Tokyo 5 Per Cent Loan of 1912, the president of the IBRD, Eugene Black, acted as conciliator in a dispute on whether Tokyo city bonds were to be paid in franc equivalent of the sterling value.82 A host of divergent judgments by national courts preceded this conciliation.83 It was hoped that conciliation would bridge these divergent judgments. Tokyo had suspended payment in 1928 as several bondholders managed to attach debt service payments in France. Negotiations between the City and the Gold Loans Committee of the French Senate had led to a ‘compromis de base’ in 1936. This compromis provided for a revaluation of 180 per cent via the issuance of an additional 407.75 bond for each 500 franc bond with 30-year maturity. French bondholders, assembled in a masse des porteurs under new legislation, approved the compromis in 1937, insisting, however, that their bondholder representative obtain a guarantee against future devaluations from the city of Tokyo. The competent French court approved the compromis. Under a 1943 statute, the Japanese central government assumed liability on Tokyo’s sterling bonds. The franc bond, however, was held to be outside the remit of that statute. After the war, the central government contended that it was not liable for repayment of the franc bond. In 1952, when the sterling bond was rescheduled, holders of the franc bond demanded to be treated on a par with holders of the sterling bond. In negotiations, Japan offered the treatment it outlined in the 1936 compromis. The Japanese post-World War II debt restructuring contained a currency option, similar to the one in the German restructuring that gave rise to the Young Loan Arbitration.84 Gold clauses in pre-war Japanese loans issued in the United States were disregarded in the settlement. The 82 83

84

In re City of Tokyo 5 Per Cent Loan of 1912. ˆne and Cour d’Appel de Seven courts decided cases: Tribunal Civil de la Haute-Sao Besançon (sterling bonds); Tribunal Civil de la Seine (sterling bonds), reversed on appeal by Cour d’Appel de Paris (French franc); Cour de Cassation in both cases (sterling bonds), remanded to Cour d’Appel de Dijon (sterling bonds) and finally the Japanese Supreme Court (French franc) [ judgment currency in brackets]. Agreement between Japan and the United Kingdom, 1 November 1952, 172 UNTS (303), Article 9.

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1952 settlement did not, however, cover bonds issued in France, based on the technical ground that Japan had never been at war with France and could hence not be included in the settlement of debts between Japan and its former ‘enemies’. Moreover, the interpretation of the gold clause was controversial. Conciliator von Steyern found that there was no gold clause in the bonds in re Imperial Japanese Government Loan of 1910.85 Refusing to interpret the bonds himself, Conciliator Black largely affirmed that contention. He held that the ‘1936–1939 settlement provided the only firm point of departure for an equitable settlement’ and ought to be implemented in such a way as to put bondholders in nearly the position that they would have been in, had it been implemented earlier. Compensation under the two approaches was of an altogether different magnitude. The French proposition amounted to 609.79 francs for each 500 franc bond including interest; the Japanese granted only 11.13 francs per bond, or about 55 times less. The arbitrator brushed aside three challenges by bondholders against the continued relevance of the compromis and its implementation. First, that the bondholder representative exceeded his authority in negotiations with Tokyo; second, that the compromis became moot because of the war between Japan and France; third, that Tokyo’s suspension of payments due to the war frustrated the purpose of the settlement and modified radically the consideration for the settlement on which bondholders had agreed to modify their legal rights. Notwithstanding, the conciliator tempered the strict application of the 1936–39 settlement, since it would lead to bondholders receiving very little. After emphasising that in the interim more than twenty years had passed, he decided that equity required compensation for the opportunity cost. The risk of depreciation, however, remained uncompensable. Using the legal gold content of the franc as the standard of value, he determined that Japan owed a lump-sum payment of 252.57 francs per 500 francs bond, plus interest at 5 per cent, payable in the shortest possible time frame.

F. Evaluation Sovereign debt restructurings share similarities with currency reforms. On occasion, rescaling high levels of sovereign debt is a necessary ingredient for re-establishing a sound monetary system. One of the most 85

G. Delaume, ‘Gold and currency clauses in contemporary international loans’, AJIL, 9 (1960), 212–13.


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extreme examples is Germany after World War II, which suffered from a debt overhang following hyperinflation in the interwar period and its war of aggression with enormous fiscal costs. In these circumstances, the parties to the London Debt Agreement of 1953 agreed to abolish pre-war gold clauses in German debt.86 In Serbian Loans and Brazilian Loans, the PCIJ showed little reluctance to affirm jurisdiction over sovereign debt disputes involving two states. The PCIJ did not see fundamental obstacles to its jurisdiction over debt instruments governed by municipal law, so long as the creditor’s country of nationality exercised diplomatic protection. By contrast, in Norwegian Loans, the ICJ held that sovereign bonds governed by Norwegian law were within the domain of municipal law and outside its jurisdiction. However, the latter case does not necessarily stand for the proposition that sovereign bonds governed by municipal law are outside the orbit of international law generally. In substance, the central question before the PCIJ, in Serbian, Brazilian and Norwegian Loans and in the other cases reviewed in this chapter, was whether to uphold gold clauses contained in sovereign lending instruments. Should debtor countries be held to their promise to pay in gold, even though many governments had abolished the gold standard in the period between the issuance of the French and Brazilian bonds and their maturity, including in France, the country of nationality of the creditors? The macroeconomic background may matter for understanding the divergent outcomes in the three sovereign debt cases before the World Court. The Great Depression and World War II led to an upheaval in the international monetary system. Exchange rates fluctuated widely as countries went off the pre-war gold standard during World War I, re-established the interwar gold standard in the mid-1920s and then went off gold again in the early 1930s. The post-war international monetary order, with the International Monetary Fund at its core, bore little resemblance to the monetary system of the interwar years. The transformation of the international monetary system by virtue of the widespread move away from the gold standard raised difficult legal questions at the micro level, including the character and extent of payment obligations under sovereign lending agreements whose origin predated the World Wars. This was especially the case when gold clauses 86

Article 12 London Debt Agreement of 1953.

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or other protective devices against depreciation (e.g. multi-currency clauses) had been included to protect creditors against depreciation. Some balance had to be struck between upholding legal obligations assumed under a monetary system that no longer existed or had been fundamentally reconfigured, and the government’s ability to pay. By the mid-1930s, gold clauses in new private debt instruments were rare.87 They persisted in legacy debt agreements that pre-dated the widespread abolition of the pre-World War I and interwar gold standard. Without going off the gold standard during the Great Depression, macroeconomic adjustment would have been much more difficult. Almost all of the burden of adjustment would have fallen on internal prices and wages, rather than relying on the adjustment of a single price – the exchange rate.88 The PCIJ decided the Serbian Loans and Brazilian Loans cases in July 1929, three months prior to the outbreak of the Great Depression. When the dispute arose in 1924, neither France, nor Serbia nor Brazil were on the gold standard. France, the country of the creditors, had earlier left the gold standard. The PCIJ limited the effects of the French abrogation of gold to France. At the time when the two judgments were delivered, France, unlike Brazil or Serbia, had returned to gold. The UK, Norway and Japan went off gold again in 1931 and the United States in 1933. France remained on gold until 1936. The outcomes in Serbian Loans and Brazilian Loans may be regarded as an emanation of the view that debtor countries should be held to their contractual obligations, irrespective of whether a wholesale transformation of the monetary system had greatly increased the burden of servicing sovereign debt in real terms – a view that held great sway at the time. There was no element of flexibility or equity that would have allowed the tribunal to take account of fundamental intervening changes to the monetary system. By the time the ICJ came to decide the Norwegian Loans case in 1957, however, the world’s monetary system had changed almost beyond recognition. The ICJ’s decision may have reflected the background factor that the gold standard in 1957 was history. Furthermore, at that time substantial flexibility during the Great Depression with respect to the previously existing gold standard was increasingly seen as important 87 88

Delaume, ‘Gold and currency clauses’, 199–200. B. Eichengreen and P. Temin, ‘The gold standard and the Great Depression’, Contemporary European History, 9 (2000), 183–207; B. A. Simmons, Who Adjusts? Domestic Sources of Foreign Economic Policy during the Interwar Years (Princeton University Press, 1994).


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for effective macroeconomic policy, against the background of the experience in the 1930s. One way of reading the Norwegian Loans case is to regard the decision as one that turned exclusively on the scope of the ICJ’s jurisdiction – the result of the idiosyncratic character of the French submission to the ICJ’s jurisdiction. An alternative interpretation is that the judges were influenced by the devastating economic effects of the Great Depression, and, with the benefit of hindsight, were wary of the strictures the gold standard entailed for macroeconomic policy and internal adjustment. From the vantage point of 1957, to hold Norway strictly to the gold clauses contained in its bonds may have seemed inequitable, despite the international monetary system moving away from the gold standard to the Bretton Woods system of fixed exchange rates. International law provides limited protection against changes to exchange rates. The Young Loans Arbitration demonstrates that a multicurrency exchange guarantee does not protect against appreciations of the debtor country’s currency. In Re Imperial Japanese Government underscores the role equitable considerations can play in mitigating gross disparities in treatment that would otherwise result for different creditor groups. In Re City of Tokyo, the severe depreciation of the yen with respect to gold was found not to be compensable, based on equitable considerations. Creditors bear the risk of fundamental changes to the monetary system, including changes to the exchange rate regime or the decision to leave a monetary union. There is no general obligation to treat creditor groups similarly in all circumstances. It does not necessarily amount to discrimination if one creditor group receives effectively a lesser payment than some other group of creditors. In such cases, equitable adjustments such as in the Japanese conciliations can mitigate too great a disparity between different creditor groups. Exchange rate policies are the quintessential general regulatory policy – one that is rarely reviewed intensively by international courts or tribunals (or, for that matter, by domestic courts). A large margin of appreciation with respect to macroeconomic policy is the norm in constitutional jurisprudence. Courts tend to avoid entanglements in fundamental economic policy decisions beyond a deferential proportionality review. Governments enjoy considerable leeway in changing the unit of account in which sovereign debt is payable.

5

Financial necessity

As seen in the Serbian and Brazilian Loans Cases in the previous chapter, Governments defaulting on their debt often invoke necessity – the claim that economic and political circumstances render the timely performance of their financial obligations unbearable or impossible. Financial necessity could be a circumstance precluding international responsibility. Article 25 of the ILC Articles on State Responsibility is widely regarded as reflective of customary international law on necessity. The Russian Indemnity Case (1912), discussed below, recognised that non-payment of public debt to another state could be justified in extreme economic and financial circumstances.1 By contrast, the German Constitutional Court in 2007 rejected the proposition that necessity could temporarily suspend a debtor country’s repayment obligations to private bondholders under municipal law.2 From a private international law perspective, the case raised the issue whether the Argentine payment moratorium deserves recognition as ‘internationally mandatory rules’.3 There is a need for further clarification on the status of financial necessity in international law. 1

2

3

Russian Indemnity Case (Russia v Turkey), 190; T. Pfeiffer, ‘Zahlungskrisen ausla ¨ndischer Staaten im deutschen und internationalen Rechtsverkehr’, Zeitschrift fu ¨r Vergleichende Rechtswissenschaften, 102 (2003), 141–94; A. Reinisch, ‘Necessity in international investment law: an unnecessary split of opinions in recent ICSID cases? Comments on CMS v Argentina and LG&E v Argentina’, JWIT, 8 (2007). Bundesverfassungsgericht, Argentina Necessity Case (BVerfG). And see S. Schill and Y. Kim, ‘Sovereign bonds in economic crisis: is the Necessity Defence under international law applicable in investor-state relations? A critical analysis of the decision of the German Constitutional Court in the Argentine Bondholder Cases’, Yearbook on International Investment Law 2010–2011 (Oxford University Press, 2011) and L. Wells, ‘Property rights for foreign capital: sovereign debt and private direct investment in times of crisis’, Yearbook on International Investment Law and Policy 2009–2010 (Oxford University Press, 2010) 477–504. R. Michaels, ‘Public and private international law: German views on global issues’, Journal of Private International Law, 4 (2008), 121–38, 137.

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financial necessity

89

A. The ‘Russian Indemnity Case’ The Ottoman government first borrowed internationally in 1854 following the Crimean War. Borrowing increased rapidly, and reached £220 million by 1875.4 On 6 October 1875, the Ottoman government announced its inability to pay, and declared a moratorium on all payments. The Decree of Mouharrem of 1881 settled the debt, and consolidated the existing debt into four series. Austria, England, France, Germany and Italy created the Council of the Ottoman Public Debt to protect the interests of their bondholders and to supervise payments.5 The Ottoman Debt Council ultimately controlled more than one quarter of Ottoman government revenues.6 Creditors gave about 45 per cent debt relief. In 1876, the Ottoman Empire defaulted again on its debt and the country was effectively bankrupt – even though the Council of Ottoman Debt attempted to provide for the satisfaction of creditor claims.7 Article 19 of the Decree of Mouharrem provided for arbitration.8 In 1903, when the Council’s revenues grew strongly, in part because of back payments by Bulgaria on the Eastern Roumelian annuity, the Council of Foreign Bondholders advocated an increase in interest payable by a quarter of a per cent. The Ottoman government disputed that the Council could fix the interest rate payable on a coupon, and the bondholders’ governments referred the question to arbitration. However, the four arbitrators failed to agree,9 and the question was ultimately referred to Lord Alverstone, Lord Chief Justice of England, as the umpire.

4

5

6

7 8

9

L. Moore and J. Kaluzny, ‘Regime change and debt default: the case of Russia, Austro-Hungary and the Ottoman Empire following World War I’, Explorations in Economic History, 42 (2005), 254. D. C. Blaisdell, European Financial Control in the Ottoman Empire: A Study of the Establishment, Activities, and Significance of the Administration of the Ottoman Public Debt (New York: Columbia University Press, 1929), H. Feis, Europe, the World’s Banker, 1870–1914 (Yale University Press, 1931), 332–34, Krasner, Problematic Sovereignty: Contested Rules and Political Possibilities, Chapter V, 127ff. Feis, Europe, the World’s Banker, 313–38; D. C. M. Platt, Finance, Trade and Politics in British Foreign Policy 1815–1914 (Oxford: Clarendon Press, 1968), 181–220. Feis, Europe, the World’s Banker, 19. W. Wynne, State Insolvency and Foreign Bondholders: Selected Case Histories of Governmental Foreign Bond Defaults and Debt Readjustments, vol. 2 ( Yale University Press, 1951), 464–68. Caillaux (former French Minister of Finance), Ador (President of the Swiss National Council), Beernaert (former Prime Minister of Belgium) and Bey (Turkish Minister).

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Lord Alverstone affirmed that the Debt Council had the authority to pay an additional quarter per cent interest.10 He first referred to the Council’s statutory obligation to use the net proceeds of revenues in fact received during a fiscal year to the repayment of outstanding debt. The Council had no right to accumulate funds beyond the fiscal year – these ought to be distributed to the creditors. The settlement for Turkey’s share of Ottoman public debt also provided for arbitration:11 If, as a result of circumstances due to force majeure, entailing a depreciation of Turkish money, the conversion of the latter into foreign currency would create serious difficulties for the Turkish Treasury, the conversion may be provisionally suspended, the Government continuing to pay the proceeds in Turkish currency. Should any disagreement arise between the Debt Council and the Government as to the necessity of such suspension, the question is to be submitted to arbitration and a decision rendered within one month. The Turkish Government agrees not to raise the question of its sovereignty in connection with this arbitration.12

During World War I, only representatives of the Central power governments remained on the Debt Council. They authorised the issuance of currency notes from 1915 to 1918, but disclaimed any responsibility for such borrowing. The cooperation between the Debt Council and Turkey was governed by various issue contracts which all provided for arbitration in case of disputes. When Turkey made a reservation when ratifying the 1928 settlement, a dispute arose as to whether that reservation would affect the payment of annuities. Arbitration was one possibility, but the parties eventually settled the dispute by negotiation.13 Fighting World War I on the side of the Central powers was a disastrous choice for Turkey’s already strained finances. Bondholders relied on Article 296 Versailles Treaty to request that their funds in Germany be returned to them at the pre-war exchange rate.14 The question came before the Franco-German mixed arbitral tribunal. The tribunal turned down the request of the bondholders: the legal right to repayment from the German Banks was vested in the Debt Council alone, and not in the Bondholders; that the Debt Council not being a subject of, or domiciled in territory of, any of the Allied Powers is not a claimant

10 11 12

Award of the Umpire, 18 July 1903; CFB Rep (1903); Wynne, State Insolvency, 464. Settlement of Turkey’s share of the Ottoman Public Debt, 13 June 1928. 13 14 CFB Rep (1928), 372. Settlement, 27–34. Wynne, State Insolvency, 483–84.

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within the meaning of the Treaty of Versailles, and that the Bondholders themselves have no ‘locus standi’ to prosecute before the Tribunal a claim to money which, in the legal sense, was vested in the Debt Council alone.15

The Council of Foreign Bondholders expressed great disappointment at the award, criticising the award for being ‘lost in a maze of legal technicalities’.16 A similar challenge by Italian bondholders before the Italo-German mixed arbitral tribunal also failed.17 The Russian Indemnity Case arose out of a dispute concerning the Ottoman Empire’s default on interest payments due under sovereign bonds given to Russian citizens as indemnity for their losses suffered during the Russo–Turkish war in 1877–78.18 The tribunal derived its jurisdiction from an arbitration agreement Russia and Turkey concluded in Constantinople in 1910. As a result of the war, Turkey had become indebted to victorious Russia, with payments staggered over ninety-nine years.19 In the Protocol of St Petersburg of 1909, Russia remitted forty of the seventy-four outstanding annuities to Turkey and lent Bulgaria the eighty-two million francs needed to gain independence from the Ottoman Empire. For Russia, the benefits of this arrangement were obvious. A more solvent debtor (Bulgaria) was now obliged to pay, rather than a debtor in financial turmoil, whose payments of the war indemnity had been irregular (Turkey).20 The facts of the case are as follows. Article 5 of the Peace Treaty between Russia and Turkey capped claims at 26.7 million francs. The Russian claims against Turkey amounted to 6.2 million francs in total. From 1884 until 1902, Turkey paid yearly instalments of 50,000 Turkish pounds. In 1902, the remaining principal balance was 1,539 Turkish pounds. It was only then that the Russian government refused a deposit of that outstanding amount to its credit, on the grounds that Turkey was also obliged to pay interest on overdue payments. Under dispute between Russia and Turkey was whether interest was due on the outstanding balance of the bonds. Because of high Turkish interest rates prevailing at the time (between 9 and 12 per cent), the

15 16 18 19 20

Franco-German Mixed Arbitral Tribunal, 29 October 1924, CFB Rep No. 51 (1924), 37. 17 Ibid., 37. Wynne, State Insolvency, 485. Russian Indemnity Case, 193; Ralston, Law and Procedure, no. 92, 75. Treaty of 27 January/8 February 1879, Convention of May 2/14 1882. G. Scelle, ‘Bulgarian independence’, AJIL, 6 (1912), 659–78, 673.

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Turkish interest obligation represented triple the amount of the principal. The arbitral compromis submitted two questions to arbitration: first, whether interest-damages were due and second, if there were, their amount.21 By way of preliminary request, Turkey disputed Russia’s standing before the tribunal, claiming that Russia was not the party in interest; rather ‘the direct creditors for the principal sums adjudged to them were the Russian subjects individually, benefiting by a stipulation made in their names’.22 The court swiftly dismissed this jurisdictional objection by reference to the quintessentially international character of the Peace Treaty, the source of the indemnity: ‘the origin of the claim goes back to a war, an international fact in the first degree . . . the source [of the claim] . . . is a treaty of peace’. Moreover, the tribunal noted that ‘the Imperial Russian government had full authority in the matter of conferring, collecting and distributing the indemnities, in its capacity as sole creditor’.23 The arbitral tribunal affirmed the Ottoman Empire’s state responsibility on sovereign bonds, holding that: no essential differences distinguish the various responsibilities of states from each other . . . the responsibility of states can be denied or admitted only in its entirety and not in part; thenceforth it would not then be possible for the Tribunal to declare this responsibility inapplicable in the matter of money debts without extending this inapplicability to all the other categories of responsibility . . . [There are] no grounds for demanding an exception to this responsibility in the matter of money debts by pleading its character of public power and the political and financial consequences of this responsibility.24

To reach this conclusion, the tribunal surveyed international case law. It took note of general principles of law and equity and examined the opinions of distinguished international lawyers. The tribunal relied on a private law analogy from domestic insolvency law: according to general principles and customs of public international law, a similarity existed between the condition of a state and that of an insolvent individual. In financial distress, both law and equity favour an analogy with the principles of insolvency law, where the payment claim must fail because of incapacity to pay.

21 22

I. Seidl-Hohenveldern, ‘Russian Indemnity Arbitration (1912)’ in EPIL, vol. 2, 246. 23 24 Russian Indemnity Case, 181. Ibid. Ibid., 193.

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On the Turkish necessity defence, the tribunal held that the exception of force majeure . . . may be pleaded in opposition in public as well as private international law . . . It is indisputable that the Sublime Porte proves by means of the exception of force majeure . . . that Turkey was, from 1881 to 1902 . . . placed in a position where it could meet its engagements only through delay and postponements, and even then at great sacrifice.25

It is remarkable that the tribunal deemed that this situation of financial distress stretched out over a period exceeding twenty years. ´tat d’exećuter les The tribunal recognised that ‘l’obligation pour un E ´tat vient a` eˆtre en danger, si traite´s peut flećhir si l’existence meˆme de l’E l’observation du devoir international est . . . self destructive’.26 Such a threat to Turkey’s existence, the tribunal found, did not exist in fact. Hence, it declined necessity. However, the tribunal construed the case as one of force majeure rather than necessity. This holding stands at odds with the tribunal’s recognition that Turkey suffered from ‘des difficulte´s financie`res de la plus extreˆme gravite´’.27 The motivation for this pronouncement may have been the small claim under consideration. At issue were merely six million francs against a total Turkish indebtedness of more than 350 million francs. It held: Il serait manifestement exage´re´ d’admettre que le payement . . . de la somme relativement minime d’environ six millions de franc due aux indemnitaires russes aurait mis en pe´ril l’existence de l’Empire Ottoman ou gravement compromis sa situation inte´rieure ou exte´rieure.28

After holding Turkey responsible as a private debtor, the tribunal affirmed its obligation to pay interest in principle. However, this obligation required explicit and regular demand. Russia put forward such demands in December 1890 and January 1891. Yet Russia subsequently relinquished its right to the payment of interest on the indemnities, as the Russian embassy in Constantinople on several occasions, without protest or reservation, accepted the outstanding balance covering only principal. In the final analysis, the tribunal rejected Russia’s claim for interest in the particular circumstances of the case. This was only because the Russian embassy accepted the balance net of interest without reservation. These omissions corresponded to a renunciation of Russia’s claims for interest payments. It was estopped from claiming interest at this stage. 25

Ibid., 187.

26

Ibid., 180.

27

Ibid., 443.

28

Ibid., 443.

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The Russian Indemnity Case stands out for treating sovereign bonds on a par with the country’s other obligations and the tribunal’s refusal to accord special privileges to defaulting sovereigns. Turkey was held responsible like an ordinary private debtor. The peculiar character of the bonds as war indemnities does not seem to lie behind the generalisation of responsibility to bonded debt. While the jurisdictional stage of the Russian Indemnity Case is of little interest today, the tribunal’s two statements of principle on liability might withstand the test of time. First, sovereigns are ordinary debtors. Second, no special regime of responsibility exists for sovereign pecuniary obligations or money debts.

B. ‘Socie´te´ Commerciale de Belgique’ In Socie´te´ Commerciale de Belgique, the PCIJ declared two arbitral awards requiring payment of principal and interest on Greek external bonds enforceable.29 In 1925, la Socie´te´ Commerciale de Belgique (Socobelge) concluded a contract with the Greek government for the construction of certain railway lines. Disputes arising under this contract were to be settled by a mixed arbitral commission. The contract included a loan to finance this construction. Greece paid for this railway construction with its external bonds. In its 1932 financial crisis, Greece defaulted on these bonds. Socobelge resorted to arbitration under the contract. The 1936 arbitral commission gave two awards, entitling Socobelge to $6.7 million in gold ($1.15 billion, $85 million) in compensation. Subsequently, Greece defaulted on these awards. In the ensuing negotiations, it promised only gradual repayment, in lockstep with its other external debt. Socobelge sought an exception on the grounds that the debt owed to it was commercial and hence not part of Greek external debt. Soon thereafter, Belgium exercised diplomatic protection and invoked the compulsory jurisdiction of the PCIJ. Greece maintained that its payment difficulties amounted to force majeure under international law, and that this financial condition justified non-payment of the arbitral awards. Servicing its debt in these conditions without any adjustment would imperil essential services and public 29

¨ lck, ‘Socie´te´ Commerciale de Belgique Socobelge (Belgium v Greece), 160–90; H. Bu Case’, in EPIL, 446. The civil court of Brussels dismissed Greece’s sovereign immunity from enforcement defence and allowed the enforcement of two arbitral awards to go forward.

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security.30 The debtor country underscored its willingness to negotiate with the company and arrange for satisfaction of the awards within the limits of its payment capacity. While Belgium accepted the premise underlying Greece’s argument in principle, it took issue with the factual basis of the Greek claim, and counterclaimed that Greece was not genuinely insolvent. The debtor country also put forward an equal treatment argument.31 Accordingly, the external debt restructuring encapsulated a fair and equitable basis for settling all Greek debt, including the arbitral awards. By contrast, Belgium maintained that no external debt restructuring could impair the execution of binding arbitral awards. These awards were simply not part of Greek external debt. It requested a declaration that the awards were binding and that their payment was not subordinate to the debt restructuring. The PCIJ held that both awards were definitive and obligatory: it could ‘neither confirm nor annul [the awards] either wholly or in part’.32 The court recalled that according to party declarations, Greece’s payment capacity was outside the scope of the proceedings.33 Hence, it lacked jurisdiction to assess Greek payment capacity.34 However, the court failed to provide a satisfactory explanation for why the parties agreed to this jurisdictional limitation.35 The court also explained that it could neither compel the Belgian government to enter into negotiations on Greek payment capacity, nor indicate bases for such voluntary restructuring arrangements. Any debt restructuring negotiations depended entirely upon Belgian goodwill. Force majeure could in principle excuse the payment of financial obligations for the duration of force majeure.36 30

31 33

34 35

36

R. Ago, ‘Addendum to the Eighth Report on State Responsibility’, YBILC, 2(1) 1980, 25; G. Watrin, Essai de construction d’un contentieux international des dettes publiques (Paris: Librairie du Recueil Sirey, 1929), 206. 32 Socobelge (Belgium v Greece), 162–63. Ibid., 174. Ibid., 177; A. Szodruch, ‘State insolvency: consequences and obligations under investment treaties’, in R. Hofmann (ed.), The International Convention for the Settlement of Investment Disputes (ICSID): Taking Stock after 40 Years (Baden Baden: Nomos, 2007) 321. PCIJ (1939), Ser. C. No. 87, 260; PCIJ (1939), Ser. A/B. No. 78, 21. Ibid. See Judge van Eysinga’s dissent, 25f; A. Reinisch, State Responsibility for Debt (Vienna: Bo ¨hlau, 1995), 16, n. 71. L. Leyendecker, Auslandsverschuldung und Vo¨lkerrecht (Frankfurt am Main: Peter Lang, 1988), 216; J. A. Ka¨mmerer, ‘Der Staatsbankrott aus vo ¨lkerrechtlicher Sicht’, Zao ¨RV, 65 (2005), 651–76; T. Pfeiffer, ‘Zahlungskrisen ausla ¨ndischer Staaten im deutschen und internationalen Rechtsverkehr’, Zeitschrift fu ¨r Vergleichende Rechtswissenschaften, 102 (2003), 141–94; A. Szodruch, Staateninsolvenz und private Gla übiger (Berlin: Berliner WissenschaftsVerlag, 2008), 321.

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There are limits to a state’s payment capacity, and international law does take these limits into account, at least in extreme circumstances.37 But the state is not the sole judge of its own solvency.38 Emphasising the need for negotiations, the PCIJ noted with satisfaction Belgian willingness to balance the legitimate interests of the company and Greece’s payment capacity. It welcomed Belgium’s disposition for negotiations, calling a friendly settlement ‘highly desirable’.39 But it could not compel the parties to negotiate. Negotiations are invariably voluntary conversations between the parties. Belgium had indicated its readiness to accommodate Greek difficulties with instalments by an ex aequo et bono settlement. The res judicata effect of its judgment would not preclude subsequent arrangements taking due account of Greek capacity to pay.40 Whereas the court unambiguously held that it lacked jurisdiction to examine Greece’s plea of incapacity to pay and hence to declare that force majeure justified non-execution of the arbitral awards, it nonetheless pointed out that, even admitting its jurisdiction, it would need to verify and not simply assume that Greece was in a situation of genuine financial distress. A detailed factual investigation of whether enforcement of the awards would substantially worsen the debtor country’s budgetary position was required prior to declaring that financial necessity justified non-performance of the awards.41 After taking the position that countries were not judges of their own solvency, the court concluded that Greece lacked a legal basis to subordinate payment of pecuniary obligations to an external debt restructuring. This was because the awards did not contemplate such a possibility. The court decided the company’s claim purely on the basis of the arbitral awards, without reference to more general principles of international law. In addition, the court observed that Greece could not link payment of the awards with the surrender of company rights recognised in the awards. Two dissenting judges voted to uphold the court’s jurisdiction. Judge Van Eysinga explained that Greece’s financial condition was a purely factual question. To ascertain this essential fact for the adjudication of the present dispute, the court could not solely rely on party submissions, but was required to hear expert testimony.42 Judge Manley Hudson, by 37 38

39

French Company of Venezuela Railroads; Russian Indemnity Case. Watrin, Essai de construction, 208 (‘[a]ppeler un juge a` trancher de telles questions, c’est diminuer la dangereuse notion de souverainete´ pour la soumettre au Droit’). 40 41 42 Socobelge (Belgium v Greece), 178. Ibid., 176. Ibid., 178. Ibid., 182.

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contrast, emphasised that the alleged lack of payment capacity called for an examination of the applicable municipal law. Or it ought to be dismissed for failing to prove the alleged impossibility, since the statistics adduced in support of that claim did not directly reveal Greece’s difficult budgetary and monetary situation.43 A sequel to the Socie´te´ Commerciale de Belgique arbitrations played out before Belgian courts after World War II. Both Belgium and Greece received Marshall Plan aid from the United States. Some of the funds allocated to Greek railway construction were deposited with Belgian banks and manufacturing companies. In December 1950, Socobelge managed to attach these funds while in transit through the Belgian payment system. Relying on sovereign immunity from enforcement, Greece maintained that Socobelge lacked legal title to these monies. The Belgian court held that neither sovereign quality nor international comity required immunity from enforcement and refused to vacate the attachment.44 Apparent threats by the United States government to discontinue the Marshall Plan persuaded the Belgian government to intervene and to encourage a friendly settlement between Greece and Socobelge.45 In the French Company of Venezuela Railroads Case, the France–Venezuela mixed claims commission held that a sovereign insolvency, caused by factors largely outside the debtor country’s control, could preclude the debtor country’s responsibility for ‘inability to pay its just debts’.46 The commission restated the position of international law as follows: ‘In general, it may be said that intervention is not warranted in the case of honest inability to pay its debts, but only when, the means being at hand, the debtor state wilfully refuses to pay.’47 Self-preservation of the state, the highest form of political organisation, could justify the non-payment of certain outstanding liabilities. The tribunal justified its holding with reference to the concept that the state’s ‘first duty was to itself. Its own preservation was paramount.’48

43 44 45 46

47

48

Ibid., 186. Socobelge v Greece, 30 April 1951, RCDIP 41 (1952), 111, note by C. A. Colliard. AJIL 47, 509 note 3. French Company of Venezuela Railroads, 353. Cf. the Russian Indemnity Case, where the tribunal accepted necessity in principle, while holding that the prerequisites for the defence were not met in the particular circumstances of that case. E. Borchard, The Diplomatic Protection of Citizens Abroad (New York: Banks Law Publishing, 1915), 312. Russian Indemnity Case (Russia v Turkey).

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sovereign defaults

Since the creditor’s claim ‘came to an empty treasury, or to one only adequate to the demands of the war budget’, it had to fail.49 Emphasising the insurance function of necessity, the tribunal held that responsibility was excluded: for the conditions which existed in 1899, prostrating business, paralyzing trade and commerce, and annihilating the products of agriculture; nor for the exhaustion and paralysis which followed; nor for its inability to pay its just debts; nor for the inability of the company to obtain money otherwise and elsewhere. All these are misfortunes incident to government, to business, and to human life. They do not beget claims for damages.50

Implicitly, the tribunal recognised that debtor states could rely on the defence of incapacity to pay (here discussed under the banner of necessity). In the Socobelge Case, the tribunal declined its jurisdiction to examine a debtor country’s financial necessity. However, accepting the parties’ views, it noted that a country had a right to maintain its essential public services even in financial distress: ‘Doctrine recognizes in this matter that the duty of a Government to ensure the proper functioning of its essential public services outweighs that of paying its debts.’51 By contrast, Serbian Loans rejected a defence based on somewhat less pressing, yet still exogenous and fortuitous, economic circumstances resulting from World War I: ‘despite its grave economic consequences [the war itself did not affect] the legal obligations of the contracts between the Serbian government and the French bondholders. The economic dislocation caused by the war did not release the debtor State.’52

C. ICSID cases arising out of Argentina’s default Argentina raised the necessity defence based on the gravity of its financial crisis in many ICSID arbitrations. It relied on both customary international law, as reflected in Article 25 ICSID Convention and Article XI of the Argentina–US BIT. The tribunal in CMS v Argentina dismissed Argentina’s state of necessity defence, despite a serious financial crisis.53 LG&E v Argentina reached the opposite conclusion on identical facts,54 a serious 49 51

52 54

50 Ibid. French Company of Venezuela Railroads, 353. R. Ago, ‘Addendum to the Eighth Report on State Responsibility’, YBILC, 2(1) (1980), 25, n. 7. 53 Serbian Loans Case, 39–40. CMS v Argentina (Merits), paras. 214ff, 304ff. LG&E v Argentina (Liability).

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inconsistency in ICSID jurisprudence.55 The necessity defence is also likely to play an important note in the three bondholder arbitrations arising out of Argentina’s sovereign default that started in 2007. The Enron tribunal found that Argentina did not find itself in a situation of necessity, because the economic crisis had not put the very existence of the state at risk and because Argentina’s policy response was not the only way to deal with the crisis.56 Moreover, Argentina had also contributed to the crisis in significant ways.57 On Article XI of the BIT, the tribunal held that it was not self-judging. The conditions for its application were also not met. To reach this conclusion the tribunal reasoned in similar ways as in its rejection of the necessity defence under customary international law. It read the test for necessity under customary international law into Article XI. The annulment committee took issue with the tribunal’s approach, in particular its application of the ‘only way’ criterion. This criterion had an autonomous legal meaning. Tribunals could not simply rely on the evidence of one expert. The committee chastised the tribunal for ‘applying an expert opinion on an economic issue’.58 Rather than applying the applicable law, the tribunal had relied exclusively on one expert over conflicting evidence of another expert: ‘On no view could Professor Edwards be said to have expressed an expert opinion on these questions. Professor Edwards is an economist and not a lawyer . . . When Professor Edwards stated that Argentina had other options for dealing with the economic crisis, he so states as an economist, and does not suggest that these other options would have amounted to relevant alternatives for purposes of the “only way” requirement of Article 25 of the ILC Articles.’59 Accepting Argentina’s argument, the committee pointed out that ‘there will almost inevitably be more than one way for a Government to respond to any economic crisis, and if this interpretation were 55

56

57 58

Reinisch, ‘Necessity in international investment law’, 191–214; S. Schill, ‘International investment law and the host state’s power to handle economic crises: comment on the ICSID decision in LG&E v Argentina’, J Int’l Arb, 24 (2007), 265; M. Waibel, ‘Two worlds of necessity in ICSID arbitration: CMS vs. LG&E’, Leiden Journal of International Law, 20 (2007), 637–48. Enron v Argentina (Merits), paras. 304–09 (‘no convincing evidence that the events were out of control or had become unmanageable’, para. 307); for criticism of this approach, see Waibel, ‘Two worlds’. Enron v Argentina (Merits), paras. 311–12. 59 Enron v Argentina (Annulment), para. 393. Ibid., para. 374.

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correct, the principle of necessity under customary international law could rarely if ever be invoked in relation to measures taken by a Government to deal with an economic crisis’.60 The committee also raised the issue of whether a government could opt for a measure that was likely to be more effective in safeguarding an essential interest (and violate its international obligations), over a measure that was likely to be less effective (and in compliance with its international obligations).61 The tribunal had also flagged as two additional issues who the appropriate decision-maker is and the relevant point in time for assessment. Should an arbitral tribunal, with the benefit of hindsight, substitute its own judgment for that of the government in question or is the latter accorded a margin of appreciation?62 The committee pointed out that its function in annulment proceedings was not to answer these questions. The committee annulled the tribunal’s award that prevented Argentina from relying on necessity under both customary law and Article XI of the BIT. As a result, the committee also annulled the finding of a breach of the fair and equitable treatment standard. Similarly to the annulment committee in CMS v Argentina, the annulment committee in Enron drew the attention of current and future tribunals to essential questions in applying necessity in future cases. The Sempra annulment committee affirmed that the Sempra tribunal committed a manifest excess of power under Article 51(1)(b) ICSID Convention by failing to apply Article XI of the BIT. The tribunal had characterised that article as not self-judging and hence reviewable by the tribunal – a position which the annulment committee said was outside its remit.63 Argentina argued in the annulment proceedings that the tribunal conflated the customary circumstance precluding wrongfulness and Article XI of the BIT, which was a primary rule that limited the scope of the BIT’s substantive obligations.64 The annulment committee held that Article 25 was lex specialis to customary international law. The committee examined in detail whether Article XI was self-judging, taking into account expert evidence, preparatory materials and subsequent practice of the two treaty parties. The committee prefaced its reasoning with the foundational role of state consent and the BIT’s essential bargain: ‘[w]here the treaty permits or 60 62

Enron v Argentina (Annulment), para. 369. 63 Ibid., para. 372–73. Ibid., para. 172.

61 64

Ibid., para. 371. Ibid., para. 115.

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excuses conduct adverse to the investor in specific circumstances enunciated in the treaty, it follows that the terms of the treaty itself exclude the protection to the investor that the treaty would otherwise have provided’.65 The committee found the tribunal’s reasoning insufficient. To hold Article XI to be self-judging, as the tribunal had done, was not necessarily inconsistent with the treaty’s object and purpose.66 The committee also criticised the importation of Article 25’s prerequisites into Article XI, ostensibly on the ground that the definition in Article 25 was peremptory and that hence there was ‘no need to undertake a further judicial review’.67 The committee pointed out that Article XI differed materially from Article 25, both in its legal elements and its character.68 If the legal elements of Article XI were met, the conduct would not be wrongful in the first place. The committee held that the tribunal made a fundamental error in applying the applicable law, which constituted a manifest excess of power. In the three Suez cases against Argentina, the tribunals (composed of the same arbitrators) noted the severity of Argentina’s crisis, and then explained that the severity of a crisis, no matter the degree, is not sufficient to allow a plea of necessity to relieve a state of its treaty obligations. The customary international law, as restated by Article 25 of the ILC Articles, quoted above, imposes additional strict conditions. The reason of course is that, given the frequency of crises and emergencies that nations, large and small, face from time to time, to allow them to escape their treaty obligations would threaten the very fabric of international law and indeed the stability of the system of international relations. It is for this reason that the International Court of Justice, other tribunals, and scholars have warned of the defense’s exceptional nature and of the strict conditions surrounding its application.69

The tribunal cursorily dismissed Argentina’s contention that its actions were the only way to safeguard an essential interest.70 It also agreed with the CMS tribunal that Argentina had contributed significantly to its crisis, and was barred from relying on necessity on that ground too.71

65 67 69

70 71

66 Sempra v Argentina (Annulment), para. 187. Ibid., para. 194. 68 Ibid. para. 188. Ibid., paras. 198–204. Suez v Argentina III, para. 258 and AWG v Argentina, para. 258; Suez v Argentina I, para. 236. Suez v Argentina III, para. 260; Suez v Argentina I, para. 238. Suez v Argentina III, para. 263; Suez v Argentina I, para. 241.

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Argentina breached the fair and equitable treatment standard. A crucial difference between the Suez cases and the Argentina cases arising out of the financial crisis under the Argentina–US BIT was that Argentina– France and the Argentina–UK BIT did not include a non-precluded measures clause.

6

National settlement institutions

A. Creditor organisations Bondholder organisations aggregate the interests of many creditors, and thereby facilitate collective action, even in the absence of legal relationships between individual lenders. Typically, individual sovereign creditors are not bound together by any legal relationship.1 If such private–state renegotiation of debt instruments succeeds, there is no need to elevate the dispute to the inter-state level, avoiding the potential for political embarrassment and diplomatic turmoil. The British Corporation of Foreign Bondholders (CFB) was the most active organisation of private creditors, operating from 1869 to 1988.2 It was semi-official in the sense that it had Whitehall’s sanction and full support. But it was not a government agency, and could press for payments without being overly concerned about the repercussions for foreign policy.3 The CFB initiated arbitration against Ecuador, Santo Domingo, Venezuela, Guatemala and Honduras.4 When arbitrating a sovereign debt dispute against Venezuela early in the twentieth century, it obtained less than 20 per cent of its original claim.5 In many cases, creditors assembled in this organisation used their leverage resulting from their ability to block continued access to the 1

2

3

4

5

E. Borchard, State Insolvency and Foreign Bondholders: Vol. 1, General Principles (Yale University Press, 1951), 3. See the corporation’s highly informative annual reports. P. Mauro and Y. Yafeh, ‘The Corporation of Foreign Bondholders’, (2003) IMF WP/03/107 give an excellent overview. J. H. Ronald, ‘National Organizations for the Protection of Holders of Foreign Bonds’, George Washington Law Review, 3 (1935), 411–53, 428–31. P. Mauro, N. Sussman and Y. Yafeh, Emerging Markets and Financial Globalization: Sovereign Bond Spreads in 1870–1913 and Today (Oxford University Press, 2006), 154. CFB Rep (1907), 22.

103

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London money market. Defaulting governments unwilling to negotiate on the Corporation’s terms could face a severe tightening of credit and even a complete loss of market access for long periods of time. Similarly, on the New York Stock Exchange, informal rules meant that approval of sovereign bonds from defaulted governments was unlikely.6 Similar loan boycotts were used elsewhere. The consistent practice of the US Department of State was that defaults on sovereign bonds were matters primarily for direct negotiation and settlement. Bondholders purchased at their own risk. This is why the government encouraged the establishment of the Foreign Bondholders’ Protective Council, a disinterested non-profit organisation to safeguard the interests of the scattered and numerous bondholders. Its task was to negotiate with foreign governments on behalf of American holders of defaulted foreign bonds. It did not act as agent, nor did it enter into any kind of agreement with a bondholder. Title II of the Securities Act of 1933 allowed for setting up a Corporation of Foreign Security Holders, modelled on the British Corporation of Foreign Bondholders. President Roosevelt decided that it was not in the public interest to set up a public agency, provided that an adequate private organisation could be created instead. In 1933, the Secretary of State, the Secretary of the Treasury and the Chairman of the Federal Trade Commission requested the formation of the Foreign Bondholders Protective Council. At the height of the sovereign default wave, the US government believed such an organisation to be in the national interest: ‘While relenting in our efforts to collect on foreign debts due the American government, we took steps to salvage the defaulted private loans of American investors by . . . organizing a disinterested and independent organization.’7 In France, the Association Nationale des Porteurs Français de Valeurs Mobilie`res defended the collective interest of French bondholders from 1898 onwards.8 The French government lent considerable support to this association. When the Permanent Court of International Justice was called upon to decide the Serbian Loans Case, the foreign ministry exhorted interested parties to look to the Association Nationale as their interest group and for representation, rather than looking to the government.9 Other private organisations that bundled private creditors in negotiating settlements with defaulted countries included the Vereeniging 6 7 8 9

Borchard, State Insolvency and Foreign Bondholders, xxiv, notes 9 and 10. H. Feis, 1933: Characters in Crisis (Boston: Little, 1966). Borchard, State Insolvency and Foreign Bondholders, 212–13. Journal Officiel de la Re´publique Française, 25 May 1928, 5554. Serbian Loans Case, 40ff.

national settlement institutions

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voor den Effectenhandel (Netherlands, 1876) and the Association pour la De´fense des De´tenteurs de Fonds Publics (Belgium, 1898). Similar organisations were created in Switzerland, Italy, and Germany.10 After World War II, bondholder organisations were less active, in line with the shift to official financing under fixed exchange rates supervised by the Bretton Woods institutions. Since the 1990s, private creditor organisations have again taken on a more active role. Two good examples are the Global Committee of Argentina Bondholders (GCAB) and the American Task Force Argentina (ATFA), led by two former highranking officials in the Clinton administration.11 The next section examines a unique intergovernmental institution to restructure the large official debt overhang arising out of World War I: the World War Foreign Debt Commission.

B. World War Foreign Debt Commission Congress created the World War Foreign Debt Commission in February 1922 to offer a solution to the rapidly growing problem of intergovernmental indebtedness.12 After the war, the United States held large amounts of demand obligations of many European countries. Due to the prevailing economic conditions, many governments could not pay them according to their terms. The United States realised it needed to make adjustments in the form of definite settlements. In the Great Depression, all European countries with the exception of Finland defaulted on loans advanced by the United States to aid their war effort. Many debtor governments pleaded their inability to pay the full face value of their debts due to the effects of the worldwide economic depression. The capacity of the Allies to repay the United States depended on receiving German war reparations, which were not forthcoming as promised. The financial quagmire illustrates the vicious circle of borrowing and inability to pay that bedevilled intergovernmental fiscal relations in the interwar period. 10

11 12

R. P. Esteves, ‘Quis custodiet quem? Sovereign debt and bondholders’ protection before 1914’, Department of Economics, Oxford University, Discussion Paper Series, No. 323, April 2007 5; Ronald, ‘National organizations for the protection of holders of foreign bonds’, 411–53; M. R. Adamson, ‘The failure of the Foreign Bondholders Protective Council experiment, 1934–1940’, The Business History Review, 76 (2002), 479–514. See www.atfa.org/. ‘An Act to create a commission authorized under certain conditions to refund or convert obligations of foreign governments held by the United States of America, and for other purposes’, Pub. L. No. 67–139, 42 Stat. 363 (1923).

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As Jessup wrote, ‘[w]here loans are extended by one government to another the problem is at once set upon a different plane and some of the bases of Drago’s arguments are eliminated. But such intergovernmental loans may still be used as the basis for pressure by strong states against the weak. That difficulty will not be overcome until international loans are contracted under international auspices.’13

Dealing with the war’s debt overhang Despite the importance and breadth of its work, the World War Foreign Debt Commission has received almost no mention in the literature.14 It was an innovative method of dealing with the large debt overhang from World War I through a mix of diplomacy and adjudication. The Commission was created in 1923 and authorised to settle debts with other governments within parameters set by Congress and subject to approval of each restructuring agreement by Congress.15 Its authority expired in 1927.16 A central principle was full disclosure. Debtor governments were expected to ‘place in the hands of the Commission full information regarding the financial and economic condition of the debtor country’. When the Commission was created, the US Treasury Department held more than $10 billion ($2 trillion, $105 billion) in foreign government debt. This debt comprised $9.4 billion ($1.8 trillion, $99 billion) in Liberty bonds issued by the US Treasury Secretary with approval of the Country

Nominal value

Share of GDP

GDP deflator

Belgium Cuba Czechoslovakia France Great Britain Greece Italy Liberia Rumania Russia Serbia

$350 million $10 million $67 million $3 billion $4.3 billion $48 million $1.65 billion $26 million $25 million $187 million $27 million

$68 billion $2 billion $13 billion $582 billion $835 billion $9 billion $320 billion $5 million $5 billion $36 billion $5 billion

$4 billion $105 million $707 million $31 billion $45 billion $500 million $17 billion $0.3 million $265 million $2 billion $285 million

Source: FDC, 1–10. 13 14

15

P. C. Jessup, A Modern Law of Nations: An Introduction (New York: Macmillan, 1956), 115. Borchard and Wynne’s seminal study of sovereign insolvency only alludes to the ‘intergovernmental debt settlements of 1923’, State Insolvency and Foreign Bondholders, 38. 16 See n. 12 above. Public Law No. 327, 68th Congress, H.R. 9804.


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President; $574.9 million ($111 billion, $6 billion) in sale of surplus war materials and $84 million ($16 billion, $886 million) for relief supplies.17

The World War Foreign Debt Commission’s mandate and method of operation The Commission initially had five senior members, including three at Secretary level. Ex officio the US Treasury Secretary served as chairman.18 The President appointed the four other members, with the advice and consent of the Senate. The inaugural members were Charles E. Hughes, Secretary of State (replaced by Frank C. Kellogg in March 1925); Herbert C. Hoover, Secretary of Commerce; Senator Reed Smoot and Theodore E. Burton, Member of the House of Representatives. The 1923 amending Act enlarged the Commission from five to eight members. The Commission’s debt restructuring mandate was broad. It was authorized to refund or convert, and to extend the time of payment of the principal or the interest, or both, of any obligation of any foreign government now held by the United States of America, or any obligation of any foreign government hereafter received by the United States of America . . . arising out of the World War, into bonds or other obligations of such foreign government in substitution for the bonds or other obligations of such government or hereafter held by the United States of America, in such form and of such terms, conditions, date or dates of maturity, and rate or rates of interest, and with such security, if any, as shall be deemed for the best interests of the United States of America.

However, the Commission’s authority was limited in several crucial respects. First, maturities could not be extended beyond 15 June 1947. Second, any refunded debt obligation had to carry a minimum interest rate of 4¼ per cent per year. Third, after the first restructuring the Commission had no authority for a further restructuring with the same government. And fourth, one government could not be substituted for another government as obligor. Debtor governments put forward proposals for restructuring their debt to the Commission. At the time, Armenia, Greece and Russia had no government recognised by the United States, and could not propose a restructuring to the Commission. There was special authority to negotiate with Austria, as explained in greater detail below. Cuba was current on its debt, and Liberia and Nicaragua had already funded their debt. That left Belgium, Czechoslovakia, Finland, France, Great Britain, Hungary, Poland, Romania and Serbia, which designated 17

FDC, Report for Fiscal Year 1922, 1–10.

18

Andrew W. Mellon.

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negotiators to discuss proposals with the Commission. The objective of these meetings was to conclude funding arrangements in the near future, though France expressed a desire to postpone indefinitely until the financial situation of the government became clearer. The negotiators were senior officials, often finance ministers and central bank governors. The lead negotiator for France was Jean Parmentier, director of the movement of funds of the French Treasury and Joseph Caillaux, finance minister. Robert Horne and Stanley Baldwin, Chancellors of the Exchequer, and Montagu Norman, Governor of the Bank of England, negotiated on behalf of the UK. In 1923, the Commission held eighteen meetings.19 In negotiations with the UK it became apparent that no agreement could be reached on the basis of the authorisation given by Congress, and the Commission began to explore another basis for settlement. Special provision for an agreement with UK was made, giving greater leeway to the Commission in the negotiations. The Commission gained the authority to extend maturities beyond 1947 and set rates of interest below 4 per cent.20

The British settlement A large portion of the debt arose out of World War I. US wartime lending was the source of the British indebtedness of more than $4.3 billion. The UK argued that it did not incur this debt for its own benefit, but rather for other allies. Only the UK had the creditworthiness during the war to borrow such large amounts. The UK maintained that it had acted mainly as a conduit for loans to other governments. It was clear that the ‘financial relations among the Allies, brought about by the war, are closely interwoven’.21 In a letter to US President Wilson, British Prime Minister Lloyd George referred to the ‘knotty problem of interallied indebtedness’.22 Britain, France and Italy had borrowed from the United States. France also borrowed from the UK; Italy from France. France, for example, loaned more than 10 billion francs to its allies.23 19 20

21 22

23

FDC, Report for Fiscal Year 1923, 10. Amendment to Act to create Foreign Debt Commission, Pub. L. No. 67–455, 42 Stat. 1325 (1923). FDC, 64. Quoted from FDC, 72; A. Salter, ‘War debts’, International Affairs, 12 (1933), 147–67, summarises the British view on the interlinkages between war debts and reparations. FDC, 72.


109

The US government took the view that ‘advances [were made] to each Government to cover the purchases made by that Government and would not require any Government to give obligations for advances made to cover the purchases of any other Government. The advances by the British Government, evidenced by its obligations, were made to cover its own purchases, and advances were made to the other allies to cover their purchases.’24 It stood by this principle throughout the negotiations: It has been at all times the view of the United States Treasury that questions regarding the indebtedness of the Government of the United Kingdom of Great Britain and Northern Ireland to the United States Government and the funding of such indebtedness had no relation either to questions arising concerning the war loans of the United States and of the United Kingdom to other governments or to questions regarding the reparation payments of the central Empires of Europe.25

The British charge´ d’affaires wrote to Assistant Secretary Leffingwell along those lines: we should welcome a general cancellation of intergovernmental war debts. The moral effect would even be a greater practical change and fresh hope and confidence would spring up everywhere. The existence of these international debts deters neutrals from giving assistance, checks private credits, and will, I fear, prove a disturbing effect in future international relations.26

US Treasury Secretary Houston replied that a general debt cancellation would be counter-productive and out of the question: any proposal of such character [general cancellation of war debts] would, I am confident, serve no useful purpose. On the contrary, it would, I fear, mislead the people of the debtor countries as to the justice and efficacy of such a plan and arouse hopes, the disappointment of which could only have a harmful effect. I feel certain that neither the American people nor our Congress whose action on such a question would be required is prepared to look with favor upon such a proposal.27

President Wilson similarly declined debt cancellation, and referred to popular opinion and Congress’s intransigence on debt forgiveness. The US position was clear. Some accommodation on the terms of repayment was feasible, but large-scale debt forgiveness was not. The United States strenuously opposed linking German reparations and interallied indebtedness. 24 25 26

Statement of the US Secretary of the Treasury, 24 August 1922, quoted in FDC, 4. Memorandum, June 1920, US Secretary of the Treasury to UK Ambassador, FDC, 5. 27 FDC, 68. FDC, 68–69.

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No power has been given by the Congress to any one to exchange, remit, or cancel any part of the indebtedness of the allied Governments to the United States . . . It is highly improbable that either the Congress or popular opinion in this country will ever permit a cancellation of any part of the debt of the British Government to the United States in order to induce the British Government to remit, in whole or in part, the debt to Great Britain of France or any other of the allied Governments, or that it would consent to a cancellation or reduction in the debts of any of the allied Governments as an inducement towards a practical settlement of the reparation claims . . . the funding of these demand obligations of the British government will do more to strengthen the friendly relations between America and Great Britain than would any other course of dealing with the same.

The negotiations with the UK were crucial, as they set the standards for negotiations with other governments. The UK delegation highlighted that it came ‘with the express intention of repaying our debt’.28 To underscore its quality as a good debtor, the chancellor added that ‘[h]ad it been possible to find in the world a nugget of gold worth 4,000,000,000 [$0.83 trillion, $45 billion] we would have spared no sacrifice to secure it and we would have brought it with us, but unfortunately the limitations of nature put such a simple method of payment out of the question and we have to explore other means’. The Chancellor then emphasised the importance of finding a mutually agreeable solution in the interest of friendly international relations and the revival of world trade: We meet to-day under extraordinary circumstances. We meet to settle the largest single financial transaction, I believe, in the history of the world. We are here to arrange the terms of the payment of the British debt to the United States. That debt was contracted in a common cause. It was the first contribution made by the United States to save civilization from being engulfed and free peoples brought under the destructive power of a military autocracy . . . The payment of our debt to you involves much more than the transfer of a huge sum from London to Washington. It must affect the future well-being of both countries and on their prosperity depends to a large extent that of the entire world. The settlement we make here will determine the condition and material welfare of the great mass of wage earners in Great Britain and the United States, their wives and children.29

The US reached agreement with the UK in principle on 31 January 1923. The President then submitted the proposed settlement to the Congress, 28

29

Opening Statement by the Right Hon. The Chancellor of the Exchequer at the Opening Meeting of the Anglo-American Debt Commission on Monday, 8 January 1923, FDC, 91. FDC, 91.


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which authorised the settlement with the UK on 28 February 1923.30 The agreement restructured $4.6 billion ($0.75 trillion, $47 million) of debt, including $629 million ($105 billion, $6.5 billion) in accrued and unpaid interest up to 15 December 1922, into bonds, with the option for the UK to make the payments at three-year intervals. The Commission recognised that it would have been unjust to demand a higher rate of interest such as was maintained during the war and reconstruction, and would most likely have defeated attempts at settlement. The UK’s high unemployment and existing high levels of taxation were reflected in the early years of the repayment schedule. The first instalment was $23 million ($4 billion, $240 million), to gradually increase to $175 million ($30 billion, $2 billion) in the sixtysecond and last year of repayment. One British observer noted that the British settlement was ‘obviously less favourable than the settlements subsequently made with France’.31 It was ‘the first clearing of the sky in a debt-burdened world, and the sincere commitment of one great nation to validate its financial pledges and discharge its obligations in the highest sense of financial honor’.32 The interest rate was fixed at 3½ per cent semi-annually, a central departure from the previous Congressional mandate. Interest might be deferred for the first five years and repaid with the principal on the issue of the requisite bonds. In recommending the settlement to Congress, the Commission explained its belief that the proposed settlement was ‘fair and just to both Governments, and that its prompt adoption will make a most important contribution to international stability’. The objective of the settlement was not just economic recuperation of the borrowing countries, but global recovery.33 President Harding enthusiastically recommended the proposal as ‘a business settlement fully preserving the integrity of the obligations’, which constituted ‘the first great step in the readjustment of the intergovernmental obligations growing out of the war’.34 Harding pointed out that ‘widespread clamor for the cancellation of World War debts, as a fancied but fallacious contribution towards peace – a clamor not limited to the lands of debtor nations but insistent 30

31 33

Address of the President of the United States to the Congress, 7 February 1923, Submitting the Report of the World War Foreign Debt Commission on the Proposed Settlement with Great Britain; Agreement for the Funding of the Debt of Great Britain to the United States, 18 June 1912, FDC 106–13. 32 Salter, ‘War debts’, 155. Address by President Harding, FDC, 98. 34 Ibid. 96–97. Ibid., 97.

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among many of our own people’ had been resisted. The proposed settlement represented a ‘fresh stamp of approval on the validity of the debt, and agreed upon terms for its repayment’ for ‘the largest international loan ever contracted’.35 The funding and ultimate discharge of that loan on the basis of the proposed settlement constituted ‘a recommitment of the English-speaking world to the validity of contract’.36 He continued: ‘[T]he failure of the British undertaking would have spread political and economic discouragement throughout the world and general repudiation would have likely followed in its wake. But here is kept faith – willingly kept, let it be recorded.’37

Settlements with other European debtors A series of other settlements soon followed. Congress approved Finland’s settlement on 12 March 1924. Bonds amounting to $9 million ($1.5 billion, $93 million) were issued, and $8.2 million ($1.35 billion, $85 million) in demand obligations cancelled in return.38 Hungary reached a settlement for its Relief Series C 1920 bond.39 The country urgently needed a reconstruction loan, for which it was essential that the lien of bondholders of Series C be subordinated to that of the new loan. The new money came from a loan by the Reparation Commission of $50 million ($8.2 billion, $520 million). An agreement similar to the one with Finland and the Austrian reconstruction loan was reached. The security was released, subject to a most-favoured creditor clause. Other settlement agreements include Poland in November 1924,40 Lithuania in December 1924,41 Latvia in September 192542 and Romania in December 1925.43 Belgium reached agreement with the United States in August 1925.44 The Belgian debt was divided into two parts. At the Versailles Peace 35 38

39

40

41

42

43

44

36 37 Ibid., 98. Ibid. FDC, 100. Settlement of the Indebtedness of the Republic of Finland to the United States, Pub. L. No. 68–41, 43 Stat. 20 (1924) (follows British terms). Settlement of the Indebtedness of the Kingdom of Hungary to the United States of America, Pub. L. No. 68–128, 43 Stat. 136 (1924). Settlement of the Indebtedness of the Republic of Poland to the United States of America, Pub. L. No. 68–299, 43 Stat. 720 (1925). Settlement of the Indebtedness of the Republic of Lithuania to the United States of America, Pub. L. No. 68–298, 43 Stat. 719 (1926). Settlement of the Indebtedness of the Republic of Latvia to the United States of America, Pub. L. No. 69–151, 44 Stat. 378 (1926). Settlement of the Indebtedness of the Kingdom of Rumania to the United States of America, Pub. L. No. 69–167, 44 Stat. 385 (1926). Settlement of the Indebtedness of the Kingdom of Belgium to the United States of America, Pub. L. No. 69–159, 44 Stat. 376 (1926).


113

Conference in 1919, Belgium had advanced a claim for war damages as a prior charge on reparations amounting to $1 billion ($182 billion, $10 billion) in gold. Belgium had also claimed that Germany should be compelled to redeem 6.2 billion paper marks in gold which Germany forced into circulation in Belgium during the period of German occupation – marks which Belgium redeemed by the issuance of Belgian francs. Belgium advocated that France, Great Britain, and the United States should cancel her war debts, representing sums advanced prior to 11 November 1918. During a critical period of the Peace Conference, largely at the instance of President Wilson, Belgium was induced to cut her claim for war damages in half to 500 million, and to abandon her claim for 6.2 billion gold marks on the condition that France, Great Britain and the United States would forgive her pre-armistice debts and would look to Germany for repayment of the sums due. In June 1919, Clemenceau, Wilson and Lloyd George signed a letter addressed to Belgium stating their proposal that once German bonds had been delivered to the Reparation Commission, to be issued in reimbursement of all sums which Belgium borrowed from the three governments prior to the armistice, each government would accept a proportionate share of bonds on account of Belgium’s obligation to repay the loans, which obligation was thereupon to be cancelled. This arrangement was incorporated into Article 232 of the Treaty of Versailles, which the United States never ratified. Notwithstanding, to backtrack on the promise by President Wilson would have been widely seen as a breach of faith by the United States.45 The Commission recognised the lack of legal obligation on the US, but emphasised that ‘a weighty moral obligation [rested] upon this Government, since as a result of the action taken by President Wilson Belgium had waived rights which otherwise it might have obtained’.46 The Commission maintained that under no circumstances should the United States ask Belgium to repay more than the principal of the pre-armistice advances.47 The pre-armistice debt was hence settled on extremely favourable terms. The schedule of annual instalment payments stretched over a period of 62 years, without interest. However, Belgium was obliged to pay, irrespective of receipts from Germany. The settlement of the post-armistice debt, amounting to $246 million ($38 billion, $2.5 billion) in June 1925, followed a similar pattern to the settlements with other governments. 45

FDC, 41.

46

Ibid.

47

FDC, 42.

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US Treasury Secretary Mellon appealed to the Belgian delegation’s desire to put this dispute to rest, while assuring Belgium that her financial condition was duly taken into account: ‘the funding of your debts to us within your capacity to pay means far more than the mere payment by you and the receipt by us of a certain number of dollars each year. It is a recognition of the integrity of international obligations and the settlement of a question which might disturb the long friendship of our two nations.’48 Czechoslovakia’s negotiations involved a dispute over the extent of the payment obligation. The US believed that Czechoslovakia owed $92 million ($14.5 billion, $940 million). Czechoslovakia insisted that only $80 million ($13 billion, $817 million) in principal was due, and disputed all other indebtedness. The borrower suggested an audit, which would have been costly. A compromise was reached in a global settlement.49 Austria represented a special case. The US government held a series of Austrian Government Bonds of Relief Series B of 1920, which was used to purchase food on credit from the United States for $24 million ($4 billion, $200 million). Other European governments held additional bonds, which provided for a first lien on all the assets and revenues of Austria. These assets were also the subject of claims of other governments for reparations and the costs of occupying armies. The Austrian financial reconstruction plan undertaken under the auspices of the League of Nations provided that all governments with claims relating to relief, reparation or occupying armies against Austria should extend the maturity of such credits by 20 years, so as to enable Austria to borrow internationally from commercial creditors.50 Nine thousand investors bought bonds in the Austrian loan of 1923.51 Congress granted special authority for Austria, beyond the Commission’s original mandate, on the grounds that ‘the economic structure of Austria is approaching collapse and great numbers of the people of Austria are, in consequence, in imminent danger of starvation and threatened by disease growing out of extreme privation and starvation’.52 It expressed the desire to extend maturities by twenty 48 49

50 51 52

FDC, 166–67. Debt funding agreement executed 13 October 1925; Agreement for the Funding of the Debt of Czechoslovakia to the United States, FDC 195–202; Public L. No. 168, 69th Congress, H.R. 6777, 3 May 1926. ‘League body meets to assist Austria’, New York Times, 29 March 1921. Joint Resolution of Congress, 6 April 1922. H. Feis, ‘The export of American capital’, Foreign Affairs, 3 (1925), 673.


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years to relieve the imminent burden, provided other creditors grant the same lengthening of maturities. The French negotiations turned out to be particularly difficult. The Commission and France disagreed on France’s capacity to pay – whether the debt could be repaid without undermining France’s social and economic fabric. Finance Minister Caillaux noted with satisfaction that the United States ‘fully recognize the capacity of France to pay as the only basis for any settlement’.53 The Commission was prepared to accept the French view as to the immediate difficulties facing France.54 The two governments agreed to review France’s capacity to pay at the end of a five-year period, and to fix the amount to be paid only at that time. Leaving later repayments open allowed the governments to adjust the payments in light of the economic problems facing France, and their implications for her capacity to pay. Italy’s debt restructuring negotiations became a marathon. Italy accepted the principle laid down by the Commission that each debtor nation shall be considered independently and shall repay its debts within its particular capacity to pay.55 It referred to the two principal elements for determining a country’s capacity to pay contained in the report of the Dawes Commission: first, the capacity to tax and, second, the transfer capacity in foreign currency. Italy underscored that it was legally and morally obliged to treat her creditors equally, and would hence offer the UK a settlement on equal terms. After estimating its total debt burden at over $4.5 billion ($708 billion, $46 billion), about the same as the British indebtedness, Italy pointed out that its debt-servicing capacity was substantially lower than the UK’s, and pleaded that its more limited capacity be given due consideration.56 The Commission was impressed by Italy’s ‘very thorough presentation of the facts’ and its ‘representative delegation’. Italy’s delegation was composed of three members of the Cabinet, a Senator, two Representatives, and two members of the general public. In particular, Italy submitted that the Commission was ‘duty bound to take cognizance of her indebtedness to Great Britain, which reduced her capacity to pay the United States’.57 The Commission recognised that Italy could not repay her debt in full. Nevertheless, it stuck to its position that the principal must always be fully repaid. As with other settlements, alleviations operated through an 53 55

56

54 FDC, 48. FDC, 47. FDC, 218. Settlement of the Indebtedness of the Kingdom of Italy to the United States of America, Pub. L. No. 69–155, 44 Stat. 329 (1926). 57 FDC, 232. Ibid.

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adjustment of the interest rate.58 The agreement provided for a maximum interest rate of 2 per cent. During the first five years Italy was to pay $5 million annually without interest. Then for 10 years ⅛ per cent, and for successive 10-year periods, ¼ per cent, ½ per cent, ¾ per cent, 1 per cent and, for the last seven years, 2 per cent. The Commission certified that the settlement fairly represented Italy’s capacity to pay.59 The Commission also expressed the view that ‘Italy, within its capacity, has met its international obligation in the view of the expert American Commission. Neither in America nor Europe would her moral credit be hurt if then she refused to renegotiate. No government could stand in Italy which undertook in a new settlement to pay more than the expert American commission has said was fair.’60 Cordell Hull dissented from these concessions on interest payments in the Italian debt settlement. He emphasised that ‘[i]f the debts due the American government from foreign governments should be canceled or scaled, the American people must pay taxes to meet the interest and to redeem the principal to a corresponding extent. . . . The decided weight of opinion has developed, however, that they are commercial and not political debts and should be treated and honored accordingly. The American Government has been among those stoutly insisting on the integrity of these obligations in their entirety.’61 To him, the proposed settlement was unreasonable. It was ‘more in the nature of a cancellation’, with a scaling back of the obligation (principal plus interest) of $3 billion, or $2.5 billion when compared to the British settlement.62 He also took issue with deferring higher interest payments so far into the future, which he said amounted to a virtual cancellation for the first forty years of the arrangement. Finally, he noted that England is unlikely to be as generous, and will reduce its claims to a lesser extent.63 As a result, the US is likely to be treated less favourably as a creditor. Several common features are apparent in these settlement agreements before the World War Foreign Debt Commission.

Contemporary relevance Lengthening maturities was a central element to return the debtor countries to debt sustainability. The Commission took the view that

58 59

Public No. 155, 69th Congress, H.R. 6773, 28 April 1926. 60 61 62 63 FDC, 238. Ibid. Ibid., 234. Ibid. Ibid., 236.


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maturities up to two generations could avoid the need for writing down the principal. One generation in the life of a nation was said to be brief. The Commission was criticised on the very grounds that stretching out maturities to such an extent was not a mark of generosity, but imposed unnecessary hardship on debtor countries.64 Due to extremely difficult economic conditions, the second problem was the debtor countries’ payment capacity in the immediate post-war period. In this respect, the US granted substantial adjustments and accommodations to take into account the difficult economic circumstances and each country’s capacity to pay.65 For future years, a delicate balance was struck, between the Commission’s duty towards the American taxpayer to protect the principal and fairness towards those nations which borrowed during the war to aid the Allies’ war effort. In the words of the Commission: ‘The debts have not been cancelled, but the impossible has not been demanded.’66 One benefit of the settlements was the removal of uncertainty. Debtor countries knew the extent of their obligations and their payment terms.67 In this context, it was also deemed to be vital that the extent of German reparations should be fixed without delay within Germany’s ‘reasonable capacity’ to pay. The British government noted that ‘the reconstruction of Central Europe could not begin nor could the Allies themselves raise money on the strength of Germany’s obligation to pay them reparation until their liabilities have been exactly defined’.68 The United States also expressed the desire to treat the outstanding indebtedness as a business problem, rather than injecting international or domestic politics into already complicated negotiations. As US Treasury Secretary Mellon put it: ‘The question before us is of narrow compass. There are but two parties to our negotiations. Politics, local or international, are not involved.’69 International debt restructuring negotiations are a technical domain, a view that remains prominent in Paris Club restructurings today. The Commission’s task was not to supervise and implement a general debt cancellation, especially of the various European countries inter se. A global debt settlement could have achieved equal treatment of debtor countries, and could have taken equitable considerations related to these interlinkages into account in drawing up the settlement.70 Equitable

64 69

Ibid., 59. Ibid., 166.

65

Ibid. Ibid.

70

66

Ibid.

67

Ibid., 60.

68

Ibid., 72.

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considerations in the bilateral approach entered in a piecemeal fashion, as the example of Belgium’s pre-armistice debt and the substantial ex gratia reduction of Italy’s interest payments shows. An alternative to bilateral debt negotiations would have been a multilateral joint settlement – an option that was less attractive to the United States in terms of preserving its own bargaining power. The United States also cited its longstanding policy that each debtor needed to stand on its own feet. The US Treasury strongly opposed any ‘release, consolidation, or reapportionment’ of the financial obligations of foreign governments.71 By contrast, the UK’s understanding was that settlement by the Commission would not in any way prejudice the general question of interallied indebtedness. Commenting on its general experience, the Commission highlighted that there could have been no permanent economic recovery in Europe without an adjustment of interallied debts. To that end, the Commission actively cooperated with the State Department to bring about negotiations and settlements of the unfunded debts of foreign governments to the United States. From the perspective of the United States, the purpose of these settlement negotiations was twofold. First, to remove the debt question as a source of friction in its foreign relations, and second, to uphold the sanctity of sovereign financial obligations.72 Most importantly, the Commission repeatedly referred to the constraint imposed by a state’s capacity to pay. The policy pursued was to take account of each debtor country’s individual financial circumstances:73 While the integrity of international obligations must be maintained it is axiomatic that no nation can be required to pay to another government sums in excess of its capacity to pay. The Commission in its settlements with Great Britain and in subsequent negotiations or settlements has adhered to the principle that the adjustments made with each government must be measured by the ability of the particular government to put aside and transfer to the United States the payments called for under the funding agreement. Nor does the principle of capacity to pay require the foreign debtor to pay the full limit of its present and future capacity. It must be permitted to preserve and improve its economic position, to bring its budget into balance, and to place its finances and currency on a sound basis, and to maintain, and if possible, to improve the standard of living of its citizens. No settlement which is oppressive and retards the recovery and development of the foreign debtor is to the best interests of the United States or Europe.

71

Ibid., 66.

72

Ibid., 37.

73

Ibid., 59.


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To deal with inability to pay, adjustments to principal payments were unnecessary. It could also be accomplished through variations in the interest rate and maturities. In the words of the Commission, The Commission has accordingly permitted the foreign debtor to repay the principal amount of its debts, irrespective of the maturity or the character of the indebtedness, over a period of 62 years, or nearly two generations. There is no government unable to make the principal payments required on such a basis. It is felt that the lack of capacity of a government to fund its debts on the same terms as Great Britain can be readily met by appropriate adjustment or modification of the rates of interest to be paid during the period of repayment of principal. And in examining the capacity of payment, the commission looks not only at the immediate capacity, but estimates, so far as it is able to do so, the future development of the nation concerned. In applying these principles the Commission, through its experts, through the foreign representatives of the State and Commerce Departments, has assembled and studied the economic and financial data available regarding each of the foreign debtors. With this information before it, the Commission has been able to examine critically similar data presented by the representatives of the several governments in their debt-settlement negotiations and to estimate, with as reasonable accuracy as conditions permit, the capacity of payment of the particular government.74

A stick helped to bring about rapid settlements before the World War Foreign Debt Commission. Any lending to governments that refused to adjust and refund their debt obligations to the United States would be contrary to US interests. US lenders agreed to inform the State Department in advance regarding any undertaking involving loans to foreign governments. The government notified the lenders of its attitude towards a particular lending transaction, without passing upon the merits of the financing or assuming responsibility. The absence of an objection indicated that the government did not oppose such lending on grounds of national interest.75 By 1925, the Commission had restructured 63 per cent of the total principal assigned to its jurisdiction, the largest part accounted for by the British debt.76 When the term of the Commission expired, the US government had concluded agreements with other governments providing for about $9.8 billion of the principal, or 97 per cent of these obligations. The Commission was an innovative hybrid of diplomacy-cum-adjudication. Even though its members were not trained or appointed adjudicators, it gave detailed decisions based on the examination of a broad range of evidence. It applied principles, such as the payment capacity of 74

Ibid., 38.

75

Ibid., 39.

76

Ibid., 37.

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countries, consistently across a range of debtor country cases. It came to reasonable terms for the repayment of some of the largest financial transactions ever made. The experience of the World War Foreign Debt Commission commends itself for attention should similar systemic problems of sovereign indebtedness arise in the future.

C. Foreign claims commissions Foreign claims commissions are organs established by a single state, though often on the basis of an international agreement. Their typical task is to settle a broad range of property claims by the nationals of the contracting parties. They have played a particularly important role in settling mass claims. Lump sum agreements often form the basis for the distribution of funds by foreign claims commissions.77 Lump sum agreements are an important explanation for the decline in mixed commission cases after World War II. They give the negotiating states greater leeway in negotiations, and are cheaper to operate, especially with respect to mass claims. They provide a fresh start and ‘wipe the slate clean’.78 The receiving state has more discretion as to the distribution of the lump sum and the paying state is typically not involved in individual cases.79 In contrast to mixed claims commissions, the commission here is at the national level, but often still applies international law as part of its applicable law. The trade-off for this flexibility in distribution is often a limited pool of money for distribution to claimants paid for by the debtor government. A number of cases before the United States Foreign Claims Settlement Commission concerned sovereign debt, in particular loans and bonds. The United States International Claims Settlement Act of 1949 established the United States Foreign Compensation Commission. The FCSC is a permanent national commission which adjudicates private claims under a variety of settlement agreements with other countries, including lump sum agreements.80 Section 303(3) of Title III of the Act vested jurisdiction in the Commission over claims based on ‘obligations 77

78 79 80

Hans van Houtte et al., Post-War Restoration of Property Rights under International Law (Cambridge University Press, 2008), 40 and see Chapter 9.D below. R. B. Lillich, ‘Lump sum agreements’, in EPIL, vol. 3, 268. R. Dolzer, ‘Mixed claims commissions’, in MPEPIL, para. 21. R. Lillich and G. Christenson, International Claims: Their Preparation and Presentation (Syracuse University Press, 1962).


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expressed in currency of the United States arising out of contractual or other rights . . . which became payable prior to September 15, 1947’. The Commission is not an international tribunal. However, its case law may be relevant authority for international tribunals considering cases arising out of sovereign defaults, because of the international character of the cases before the Commission, the applicable law, which includes international law, and the origin of the funds available for distribution, typically through lump sum agreements. The Commission directly applies the rules contained in the lump sum agreements, without any intermediation from domestic law.81 Chapter 9.A reviews the case law of mixed commissions on sovereign debt. The next section looks at the adjudication of defaulted sovereign debt in national courts, a mechanism for enforcement that became fashionable with the advent of restricted sovereign immunity.

D. National courts Following World War II, litigation by private creditors against defaulting countries was rare because official lending dominated. Since the 1980s, however, many sovereign debt instruments issued to private creditors have been submitted to dispute settlement in national courts. Countries now routinely submit to the jurisdiction of the courts in important financial centres. This contractually agreed remedy is often the only avenue of enforcement available to private creditors. On average, creditor recovery in national courts is low. The chief reason is that judgment creditors frequently fail to find sufficient attachable assets abroad to be able to collect on their judgments. Most assets, including the most important powers of taxation, are located within the borders of the borrowing country. Often, obtaining a judgment provides little more than moral satisfaction to creditors. Nevertheless, creditors have become increasingly creative in attaching assets, and do succeed on occasion. Over time, the effectiveness of creditor remedies has increased, at least on the margin. The move towards restricted sovereign immunity of jurisdiction in important financial centres enhanced creditor protection. As a result, national courts routinely qualify the issuance of sovereign debt as commercial transactions. In the United States, the case Argentina v Weltover was an important step towards greater protection for sovereign creditors. 81

Van Houtte, Post-War Restoration, 42.

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In Weltover, the US Supreme Court held that the issuance of sovereign bonds was ‘commercial activity’ under the Foreign Sovereign Immunities Act of 1976. Even a suspension of payments for the purposes of stabilising its economy was ‘commercial activity’ because this governmental measure was connected to the issuance of the bonds.82 By contrast, the Italian Supreme Court in 2005 reached the opposite conclusion in Borri v Argentina. The court found that a default amounted to a sovereign act and was covered by immunity.83 From a policy perspective, ‘holdout’ litigation is a particular concern in sovereign debt restructurings. This term refers to collective action problems where a majority of creditors accepts a sovereign debt restructuring, whereas a minority stays outside the restructuring agreement with a view to full repayment. These creditors are called holdout or non-participating creditors. Creditors who take part in the restructuring are called ‘participating creditors’. Successful holdout litigation undermines participation by otherwise cooperative creditors.84 The country’s inability to bind in all creditors threatens to unravel the debt restructuring as a whole. The following section surveys some major sovereign debt cases in national courts. This case law is useful background for assessing the relative attractiveness of arbitration as a potential forum for claims arising out of defaulted sovereign debt. It also illustrates the substantial obstacles private creditors face in recovering on sovereign debt at both the judgment and enforcement stage. In Libra Bank Ltd v Banco Nacional de Costa Rica, Libra Bank appealed a vacatur of prejudgment attachment of Banco Nacional’s property, Costa Rica’s central bank.85 Underlying the dispute was a $40 million syndicate loan, of which Libra Bank was one member. Banco Nacional defaulted on this loan, whereupon the plaintiffs attached assets of Banco Nacional held by several New York banks. The district court reasoned that Costa Rica did not explicitly waive prejudgment immunity from attachment as required under U.S.C. }1610(d)(1). The relevant letter agreement for the loan provided that ‘the Borrower can sue and be sued in its own name and does not have any right of immunity from suit with respect to Borrower’s obligations under this Letter Agreement.’ The notes provided that the ‘Borrower hereby irrevocably and unconditionally waives any right or immunity from legal 82 84 85

83 Argentina v Weltover (1992). Borri v Argentina. E.g. LG Frankfurt (2004); Donegal v Zambia (2007). Libra Bank v Banco Nacional de Costa Rica (1983); M. Leigh, ‘Libra Bank Limited, et al. v Banco Nacional de Costa Rica, S.A. 676 F.2d 47’, 76 AJIL 851–53.


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proceedings including suit judgment and execution on grounds of sovereignty which it or its property may now or hereafter enjoy.’ The Second Circuit reversed, holding that the express use of ‘prejudgment attachment’ in the lending documentation was unnecessary. The Circuit Court construed the purpose of }1610(d)(1) as preventing inadvertent or implied waivers of immunity of prejudgment attachment. As it found no danger of inadvertent waiver here, the Second Circuit upheld the waiver. That Banco Nacional carried out central banking functions for Costa Rica was irrelevant. In Allied Bank v Banco Credito Agricola, Costa Rica adopted foreign exchange restrictions in response to a severe balance of payments crisis. A syndicate of 39 banks, on whose behalf Allied Bank was acting, sued three Costa Rican wholly government-owned banks for full principal and interest on promissory notes in default. These notes were governed by New York law and payable in US dollars in New York. In July 1982, 38 banks discontinued the suit, following a restructuring agreement. Allied Bank was the sole syndicate member to continue the suit. The Second Circuit first affirmed the lower court per curiam, finding that, independent of the applicability of the act of state doctrine, Costa Rica’s moratorium was consistent with US policy and entitled to comity. As to comity, the circuit court relied on statements by the US President, the Congress and the State Department, all of which supported Costa Rica’s debt restructuring in the Paris Club.86 Non-participating creditors could threaten that restructuring. Allied’s contention that Costa Rica acted as a commercial player in defaulting on the loans was to no avail. While the default clearly did affect the loans, qualified as commercial activity, the court explained that ‘Costa Rica was clearly acting as a sovereign in preventing a national fiscal disaster.’87 On rehearing, however, the Second Circuit found in favour of Allied and remanded the case to the district court, on the basis that its earlier interpretation of US foreign debt policy was mistaken.88 A number of amici curiae intervened in the rehearing of the case, including the US government and the New York Clearing House Association, an industry body representing financial institutions.

86 87

Libra Bank v Banco Nacional de Costa Rica (1983), 7–8. 88 This reasoning is similar to Borri v Argentina. Allied Bank v Banco de Cartago (1985).

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The court reversed its previous holding, and limited the territorial reach of the act of state doctrine. The court qualified the Costa Rican measures as a ‘unilateral attempt to repudiate private, commercial obligations’ inconsistent with US policy. In such circumstances, the court explained that US courts were not bound to recognise foreign exchange control regulations.89 Accordingly, the collection action by the syndicate member succeeded. In Banque Compafina v Banco de Guatemala, a Swiss bank brought suit on promissory notes guaranteed by the Guatemalan Central Bank.90 The New York Supreme Court awarded $1.1 million to Compafina. Banco de Guatemala’s assets, held in a New York bank, were attached. The central bank moved to quash the attachment order. The court found that assets used for official purposes in the United States were immune from prejudgment attachment, and that such immunity could not be waived. At issue was the language in }1611(b)(1) of the Foreign Sovereign Immunities Act, which provides that central bank property ‘held for its own account’ was immune. As in Allied, the opinion of US public officials was central to the outcome of the case. The president of the Federal Reserve Bank of New York stated in a written submission that: if foreign central banks such as Banco de Guatemala become concerned that their United States assets are subject to attachment by private litigants, they might withdraw their dollar assets from this country, thereby destabilizing the dollar and the international monetary system.91

The court duly applied }1611(b)(1),92 and affirmed that central bank assets were immune from prejudgment attachment. Europeénne de Banque v Venezuela concerned a syndicated loan to Venezuela. An instrumentality of the Venezuelan government liquidated the debtor bank, after it ceased payment on its debt. The District Court for the Southern District of New York declined to decide whether the Republic of Venezuela incurred liability, on the grounds that the link with US territory was insufficient, even though the loan provided New York as the place of payment. The court also underscored the distinct legal personalities of the borrower and

89 92

Ibid., 65–66. Ibid., 322.

90

Compafina v Guatemala (1984).

91

Ibid., 321.


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Venezuela.93 Creditors run into the obstacle that the borrowing instrumentality has a distinct legal personality with some frequency. In Cre´dit Français v Sociedad Financiera de Comercio, a French bank brought suit against a Venezuelan bank to recover on a loan.94 The New York Supreme Court denied the motion for summary judgment. It held that Cre´dit Français was part of a syndicate and had no standing to sue individually, overturning the district court which had allowed the individual suit to go ahead. The lending agreement concluded between nine consortium banks and the lender called for collective action by the agent on instructions of the majority.95 The court viewed syndicated borrowing as a joint venture. Without a majority vote, individual banks could not sue the sovereign debtor, as Justice Greenfield explained in colourful words: ‘The nine members of the consortium, like the famous Three Musketeers, must stand “all for one and one for all”.’96 Contrast this collective enforcement with the result in A.I. Credit Corp. v Government of Jamaica. The district court affirmed that each bank that was party to the rescheduling agreement could sue for fulfilment of the government’s contractual obligation without the consent of the other parties.97 Jamaica defaulted on its external debt in 1983, and restructured its debts in 1989 with 113 banks. One party assigned its debt to A.I. Credit after conclusion of the restructuring agreement. Jamaica defaulted twice more, in 1985 and 1987. Two new restructuring agreements were concluded. Three out of the 113 banks refused to sign the 1985 agreement, and two the 1987 agreement. A.I. Credit was one nonparticipating creditor. With reference to Jamaica’s three defaults in a single decade, A.I. Credit alone brought suit. The rescheduling agreement in question explicitly stipulated that each bank had the individual right to sue. The court observed that, under the pro rata sharing clause,98 all payments would need to be shared equally among the syndicate members. After dismissing Jamaica’s objection that individual creditors lacked standing to sue, the court also brushed aside the concern that a judgment for the applicant would impose an insurmountable financial burden: ‘It is not the function of a federal district court in an action

93 94 96 98

Europeénne de Banque v Venezuela (1988). 95 Cre´dit Français v Sociedad Financiera de Comercio (1985). IFLR 9 (7) (1985), 39. 97 Cre´dit Français International, 679. A.I. Credit v Jamaica (1987). L. C. Buchheit, ‘How to negotiate the sharing clause’, IFLR, 12 (1993), 36 and ‘Changing bond documentation: the sharing clause’, IFLR, 17 (1998), 17.

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such as this to evaluate the consequences on the debtor of its inability to pay nor the foreign policy nor other repercussions of Jamaica’s default.’99 In the court’s view, such evaluation was within the authority of the executive branch. Its sole task was to adjudicate the contractual cause of action. Such a narrow focus on the contractual aspects of the dispute, though understandable, is typical of most sovereign debt disputes in the courts of important financial centres. In Pravin Banker Associates Ltd v Banco Popular del Peru, an English bank brought suit against state-owned Banco Popular and its guarantor, the Republic of Peru, for defaulting on a loan.100 The Elliott Case arose out of the same foreign debt crisis as the Pravin Banker lawsuits. In March 1983, Peru announced that its foreign exchange reserves to service its foreign debt were running low. The country entered into restructuring negotiations with its creditors through a Bank Advisory Committee, including Mellon Bank. Restructuring negotiations broke down in 1984. Many creditors, upon whom Peru then defaulted, filed to preserve their claims from being time-barred. In 1990, all major commercial creditors agreed to suspend pending lawsuits. This suspension was to facilitate negotiations on a global settlement of Peru’s entire foreign debt, consistent with the Brady Plan. The Brady Plan was formulated in March 1989 by US Treasury Secretary Nicholas Brady. Encapsulating a new US policy on international debt, the plan encouraged commercial bank creditors to voluntarily reduce developing countries’ debt obligations. In December 1990, Pravin acquired debt with a face value of $9 million from Mellon Bank at a steep discount. The fund refused to take part in the Brady plan restructuring and sued for full payment. The defendants argued that allowing the suit to go forward would reactivate all other lawsuits by commercial bank creditors. Swayed by this argument, the district court granted a first six-month stay, before extending it by a further two months. After the expiry of these two periods, the court granted summary judgment to Pravin in the amount of $2.16 million. The court held that extending international comity to Peru’s Brady negotiations would run counter to United States policy. In Elliott Associates v Peru and Elliott Associates v Banco de la Nacioń, a distressed debt fund sued for non-payment of debt it earlier acquired at 99

Ibid., 679.

100

Pravin Banker v Peru.


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a 50 per cent discount.101 Peru argued that Elliott should participate in the Brady plan restructuring alongside all other creditors. Precisely when Peru was about to conclude a debt restructuring agreement with over 180 creditors, Elliott sought prejudgment attachment in New York. By this timing, Elliott eyed US Treasury bonds, held at the Federal Reserve Bank of New York and to be used as collateral for the Brady exchange. If successful, the attachment would foil the Brady restructuring. But the district court denied Elliott’s motions for prejudgment attachment. Instead, it found Elliott in violation of section 489 of the New York Judiciary Law, the prohibition on champerty. This doctrine prohibits the purchase of a debt with the intent and for the purpose of bringing an action. The court explained that Elliott ‘had purchased the Peruvian debt with the intent and purpose to sue’.102 Peru argued further that Elliott’s litigious ‘intent was not contingent or incidental’.103 The court explained that ‘assignments taken for the purpose, or motive, of stirring up litigation and profiting thereby are prohibited’.104 Section 489, as a public interest statute, could not be waived as Elliott suggested.105 Hence, the debt was unenforceable. Highlighting the long involvement of two of Elliott’s principals in buying and suing on sovereign debt, the court also emphasised that Elliott had intentionally ‘delayed closing its purchases of Peruvian debt until the Second Circuit had clarified the risks’.106 In addition, Elliott had not ‘realistically considered’ alternatives to a lawsuit, including participating in the Brady Plan or negotiating separately to obtain more favourable Brady terms.107 The court found that from the beginning, Elliott had bought with clear intention to sue and never demonstrated ‘a good faith negotiating position’.108 The Second Circuit overturned. Section 489, in its view, was tailored to a narrower objective than ‘maintaining a suit in return for a financial interest in the outcome’. The court explained that ‘a mere intent to bring a suit on a claim purchased does not constitute the offense; the purchase must be made for the very purpose of bringing such suit, and this implies an exclusion of any other purpose’. Instead, here the intent to bring a suit was merely ‘incidental and contingent’.109

101 102 106 109

Elliott Associates v Peru; Elliott Associates v Banco de la Nacioń. 103 104 Elliott Associates v Peru. Ibid., 346. Ibid., 351. 107 108 Ibid., 336. Ibid., 338. Ibid., 342. Elliott Associates v Banco de la Nacioń, 345–46.

105

Ibid., 356–58.

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In 2000, Elliott obtained a restraining order against Peru’s fiscal agent on coupon payments to Brady Plan bondholders in New York and Belgium. Elliott convinced courts in both jurisdictions that payment only to new holders violated the pari passu clause. Peru, faced with the threat of defaulting on its Brady bonds, paid Elliot $56.3 million to settle. This novel interpretation of the pari passu clause caused a stir in international policy circles.110 Belgium rapidly amended its financial market regulations to prevent such attachments in the future.111 In summary, non-participating creditors have been able to obtain judgments for the debt’s full face value in some cases before national courts. In others, they failed on technical grounds. Judgment creditors have often been unable to recover their claims in full because of a lack of attachable assets. Enforcement against defaulting countries often presents insurmountable obstacles – a factor that explains why arbitration, in particular before ICSID, may be attractive to sovereign creditors.

110

111

L. C. Buchheit and J. S. Pam, ‘The pari passu clause in sovereign debt instruments’, Emory Law Journal, 53 (2003), 869–922 have an excellent treatment. Article 1412bis Code Civil.

7

State succession and the capacity to pay

Section A of this chapter examines arbitral awards on sovereign debt that arose in the context of two important cases of state successions – the dismemberments of the Ottoman and the Austro-Hungarian empires after World War I. Section B considers cases where debtor governments have sought to be exempted from repayment on the grounds that previous governments incurred the debts for their own personal gain (‘odious debt’). Section C examines how international courts and tribunals have dealt with the defence of debtor states that their limited financial resources prevented them from repaying their debts in full.

A. Arbitrations on succession into sovereign debt The Ottoman Public Debt Arbitration The Ottoman Public Debt Arbitration concerned burden-sharing in sovereign debt of the former Ottoman Empire. The Ottoman Empire suspended debt payments in London soon after the outbreak of World War I on 14 September 1914.1 In 1923, Turkey also defaulted on most of its debts. After the break-up of the Ottoman Empire following World War I, Article 51 of the Lausanne Peace Treaty held each former territory of the Ottoman Empire responsible for that part of the annual debt service that corresponded to its share of the Ottoman Empire’s average total revenues over the financial years 1910–12. But Turkey was responsible for all the Ottoman debt, with the exception of wartime debts 1

L. Moore and J. Kaluzny, ‘Regime change and debt default: the case of Russia, Austro-Hungary and the Ottoman Empire following World War I’, Explorations in Economic History, 42 (2005), 254.

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to the Axis powers that were cancelled.2 The Council of the Ottoman Debt was charged with apportioning the debt. Article 51 of the Treaty of Lausanne provided in relevant part: ‘The amount of the share in the annual charges of the Ottoman Public Debt for which each state concerned is liable in consequence of the distribution of the annual charges for the loans and of the nominal capital of the Ottoman Public Debt, shall be determined by the proportion of the total revenue of each of the ceded territories in the financial years 1910–1912 to the average total revenue of the Ottoman Empire in those years.’ This provision was at the heart of the arbitration. Article 47 (4) of the Lausanne Peace Treaty provided for binding arbitration on the distribution of Ottoman public debt in the following terms within three months: The Council on the Ottoman Public Debt shall, within three months from the coming into force of the present treaty, determine, on the basis laid down by Articles 50 and 51, the amounts of the annuities for the loans referred to in Part A of the table annexed to the present section which are payable by each of the states concerned, and shall notify to them this amount . . . any dispute . . . shall be referred . . . to an arbitrator whom the Council of the League of Nations will be asked to appoint.

The Ottoman Debt Council notified the successor states of their shares on 6 November 1924. Disappointed with their apportionment, Bulgaria, Greece, Lebanon, Iraq, Palestine, Transjordan and Turkey sought arbitration under Article 47 of the Treaty of Lausanne. In its initial decision, the Council excluded the average revenues for Iraq, Palestine and Transjordan, which ceased to be part of the Ottoman Empire in 1912, from the apportionment. Appellants contended that Article 51 referred to all former territories of the Ottoman Empire and, in addition and contrary to the interpretation of the Council, Article 51 did not explicitly incorporate the principle of proportionate distribution of sovereign debt. Arbitrator Borel noted that his task was limited to finding and giving effect to the common intention of the parties, rather than devising a just and more equitable solution.3 The arbitrator gave primacy to the specific provision of the treaty. Focusing on the text of the treaty, he upheld the 2

3

Ibid., 255; W. Wynne, State Insolvency and Foreign Bondholders: Selected Case Histories of Governmental Foreign Bond Defaults and Debt Readjustments, vol. 2 (Yale University Press, 1951), 490–93. Ottoman Public Debt Arbitration.

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territorial revenue rule.4 The principle stated in the Peace Treaty was that each state was liable to pay that proportion of the total debt, as given by the typical total revenue of each state as a share of total revenue of the Ottoman Empire. He dismissed Bulgaria’s contention that the key for the attribution of the debt ought to be the benefits drawn by the various territories from the loans.5 He also rejected Bulgaria’s claim that the country did not sign the Lausanne Peace Treaty. The arbitrator held that the apportionment foreseen in the Lausanne Peace Treaty was nonetheless binding on Bulgaria, a finding that is at odds with the customary principle that treaties only bind their parties, now reflected in Article 11 VCLT. The arbitrator rejected Turkey’s claim for equal treatment on allowable deductions for other territories.6 He affirmed that customary international law did not provide for the proportionate distribution of sovereign debt among new states.7 Customary international law was indeterminate. A state acquiring territory by cession was not obliged to take over a commensurate part of the public debt.8 A range of factors influence the apportionment of debts, including territory, population, taxable assets and nationality of creditors.9 Articles 36 and 37 of the Vienna Convention on Succession of States in respect of State Property, Archives and Debts foresee the assumption of debt by the successor state as a general rule, with a deduction for territory lost. Under Article 38, no debts pass in respect of ‘newly independent States’, unless otherwise provided for by treaty. The Convention never entered into force due to a lack of signatures. The customary status of central provisions, such as the ones outlined above, is highly doubtful.

4 7

8 9

5 6 Ibid. Ibid., 551–54. Ibid., 574. Ottoman Public Debt Arbitration. P. M. Brown, ‘Ottoman Public Debt Arbitration’, AJIL, 20 (1916), 135–39; H. Alphand, Le Partage de la dette ottomane et son re`glement ´ditions Internationales, 1928), A. Andreáde`s, ‘Les Obligations financie`res, (Paris: Les E envers la dette publique ottomane, des provinces de´tacheés de l’Empire turc depuis le Traite´ de Berlin’, RGDIP 15, (1908) 585–601; V. Go ¨tz, ‘Ottoman Debt Arbitration’ EPIL, vol. 2, 220–21; M. Holm-Hadulla, ‘Ottoman Debt Arbitration’, MPEPIL (2007); CFB, Correspondence for Reference with Regard to the Imperial Ottoman Loans of 1858, 1862, 1869 (London: 1872). Alphand, Partage de la dette ottomane, 19–21. E. H. Feilchenfeld, Public Debt and State Succession (New York: Macmillan, 1931), 851ff; D. P. O’Connell, State Succession in Municipal Law and International Law, vol. 1 (Cambridge University Press, 1967), 454.

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Arbitrator Borel determined that Turkey was the sole successor to the former Ottoman Empire. If public debt remained unpaid after the states formerly composing the Ottoman Empire had paid their shares as specified in the Lausanne Treaty, Turkey, as successor to the Ottoman Empire, was bound to pay any remaining debt.10 Whether Turkey indeed continued the legal personality of the Ottoman Empire is doubtful.11 The arbitrator took a global view of public revenue, regardless of whether it accrued directly to the government concerned or to autonomous entities.12 When interpreting the key for distribution, the arbitrator did not pay heed to the equitable position that Article 51 was unjust when productive land was lost, when a customs port transferred, or when no difference between the place of payment and the place of final deposit of taxes was drawn.13 His reasoning was partly based on efficiency considerations. The surface area was the most expeditious and reliable criterion for distributing public debt. By contrast, estimating economic resources by territory is time-intensive and would probably have prolonged the arbitration beyond the required three months.14 The arbitrator then directed the Bondholders Council to reapportion the respective quotas of the Ottoman debt in line with his decision. Particularly notable about this arbitration is the speed at which the sole arbitrator arrived at his decision. Despite the complexity of the matter, he handed down his decision on 18 April 1925, only three months after he had assumed his functions on 20 January 1925.15 He thereby complied with the requirement of Article 47 Lausanne Peace Treaty, which obliged the arbitrator to reach a decision within three months from the date when the tribunal was constituted.

10

11 12

13 14

15

Cf. the similar distribution key in Article 23 Reunification Treaty between the Federal Republic of Germany and the German Democratic Republic, 31 August 1990, BGBl. II, S. 889. This Article created a special fund to service the Democratic Republic’s outstanding debt till 1993. Population size is the key for distribution, details of which are laid down in a special statute. The same principle applies to guarantees and pledges. M. Holm-Hadulla, ‘Ottoman Debt Arbitration’, in MPEPIL, paras. 12–13. Ibid., para. 9 (citing the flexibility granted by the arbitrator to French mandates due to their administrative and fiscal autonomy as the only exception). Brown, ‘Ottoman Public Debt Arbitration’, 137. Ibid.; Holm-Hadulla, ‘Ottoman Debt Arbitration’, criticises the ‘simplistic criterion of the past territorial revenue’, said to sacrifice ‘equity for the sake of practicability’ (para. 17). Brown, ‘Ottoman Public Debt Arbitration’, 136.


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Writing in the American Journal, Philip Brown enthusiastically welcomed the efficiency and simplicity of the decision: [n]ever was a simpler device contrived for the solution of more intricate, technical problems. Never was an arbitral decision characterized by greater clarity and good sense. The whole proceeding from start to finish was of the finest simplicity. It may well serve as a model for other similar arbitrations where ponderous procedure and needless delay should be avoided.16

After the arbitration was over, the successor states contended that payment in Turkish lire was sufficient. European creditors disagreed. The parties negotiated for three years, and then settled finally on a payment schedule in 1928.17 But already in 1930 that agreement was renegotiated after Turkey again suspended payments. Another restructuring agreement followed in 1933, when all Ottoman debt was consolidated into a single loan, with debt relief at about 60 per cent.18 In 1902, France allowed the flotation of a Bulgarian loan in France only on condition that Bulgaria pay off its share due under the Eastern Roumelian annuity under the Ottoman Debt Arbitration.19 The Ottoman Public Debt arbitration represents a milestone in arbitrating public debt and could inspire future arbitrations on sovereign debt instruments. In reducing the complexity of the dispute to manageable proportions and delivering a speedy award, the arbitrator defused a potentially explosive international dispute. The dispute could have easily spilled over into other areas of Turkish–Russian bilateral relations.

Austria-Hungary When the Austro-Hungarian Empire collapsed after World War I, the succession of the Empire’s pre-war debts raised many difficult legal problems. Austria-Hungary had defaulted on the debt at the outbreak of the war. The Austrian and Hungarian peace treaties established clearing offices for the settlement of the debt, from which accepted claims were paid in full. Bondholders and debtor states negotiated the succession into the Empire’s debt in Innsbruck.20 Debt service was to be paid to a Caisse Commune des Porteurs des Dettes Publiques Autrichienne et Hongroise 16 17 19

20

Ibid., 136. 18 Moore and Kaluzny, ‘Regime change and debt default’, 255. Ibid. E. Borchard, State Insolvency and Foreign Bondholders: Vol.1, General Principles (Yale University Press, 1951, 253). Innsbruck Protocol and Agreement as regards its Application, 1925.

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as an intermediary in Paris, an arrangement approved by the Reparations Commission. The aim was to avoid each bondholder receiving fractional payments from the seven debtor states.21 The agreement was limited to external debt. Domestic debt was reserved for possible future negotiations. An agreement between the debtor states and bondholder organisations concerning domestic debt noted that the payment of AustroHungarian debts in currencies other than gold and/or foreign currency ‘raises considerable difficulties, which, in spite of long negotiations, have not so far been solved’. In view of these difficulties, the parties concluded that it was in the joint interest of bondholders and debtor states to withdraw ‘from the international market bonds circulating in large numbers, the intrinsic value of which by the terms of the above Treaties, has been reduced to a very small amount, with the result that their service is impossible for certain states and very difficult for others’.22 Article 16 of the Agreement provided for ad hoc arbitration: Any contention that may arise regarding either the interpretation or the execution of the present agreement will be submitted to two arbitrators, one for each interested party. These arbitrators shall be appointed within one month of the notification by one of the parties of its demand for arbitration. If, within a period of four months, the arbitrators cannot agree as to the terms of a common ruling, they shall appoint an umpire whose decision shall be final and it shall be delivered within four months. Should the two arbitrators fail to agree on the choice of an umpire, the latter shall be appointed by the President of the Federal Tribunal of Lausanne.

State succession before mixed commissions Several state succession cases also came before mixed commissions. An early example is the Florida Bond Cases.23 British bondholders brought claims against the United States for payment of principal and interest on Florida bonds issued prior to its admission to the United States. The Anglo-American Claims Commission of 1853 dismissed their claims. When the two commissioners disagreed, the US umpire Joshua Bates, a partner at Barings Bank in London, decided that the transactions 21 22

23

CFB Rep (1931), 96. Agreement on Austrian and Hungarian Unsecured Public Debts Payable in Silver, Florins & Crowns, CFB Rep (1931), 101–02. Florida Bond Cases (Great Britain v USA).


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in question were outside the Commission’s purview. Barings had a direct interest in the matter. The bank was Maryland’s foreign agent, and Bates recognised that Baring’s fame ‘would suffer in case of default’.24 Maryland did default in 1842, even though Barings had provided a bailout loan. As to the federal government’s lack of liability, Bates drew a parallel to Canadian provinces. Without doubt, Florida, an independent republic, was the sovereign issuer, rather than the United States: The bondholders have the same remedy against the State as they had against the Territory; they have a just claim. But they are under the well-known disadvantage in both cases – they could not sue the Territory; they cannot sue the State . . . There is no difficulty in the way of individuals dealing with the separate States in any matters that concern the State alone; nearly all the States have public works and contract loans with individuals . . . To show that the Florida bondholders never supposed the United States in any way responsible, attention is called to the prospectus issued by the agents for the sale of the bonds.

After finding that Florida ‘is bound by every principle of honour to pay interest and principal’, Bates expressed the hope that ‘sooner or later, the people of Florida will discover that honesty is the best policy, and that no State can be called respectable that does not honourably fulfil its engagements’. The British commissioner Hornby, in thinly disguised criticism, remarked that his task was not to evaluate the US policy of ‘starting one of its children in its political manhood, incapacitated from discharging the debt which it had incurred during infancy for its own and its parents’ benefit’. He then cited the fundamental principle of the law of nations that ‘no public advantage is to be attained by the destruction of private interests’.25 He favoured the federal government’s responsibility because Congress had a veto over the issuance of some of the bonds. The disappointing decision, from the perspective of British bondholders, discouraged other claims by British creditors.26 In Holford and Dawson v Texas (Texas Bond Cases) before the British– United States commission of 1853, claims for payment of bonds received in exchange for furnishing an armed vessel to aid the Texan war effort against Mexico failed. The British commissioner voted in favour of 24 25 26

Letter from Bates to Ward, quoted from J. Sexton, Dollar Diplomacy, 42. Moore, Arbitrations, 3609–10 and 3612. B. C. Randolph, ‘Foreign bondholders and the repudiated debts of the Southern states’, AJIL, 25 (1931), 75.

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jurisdiction, whereas his US counterpart declined jurisdiction. Umpire Bates sided with the US commissioner. The commission lacked jurisdiction over claims by British bondholders, for they were ‘transactions with the Independent Republic of Texas prior to its admission as a State of the United States’.27 At the time, the prospect of federal assumption loomed.28 Borchard calls the umpire’s construction of the protocol ‘strict’.29 Since the commission found no evidence that there was a dispute between two governments, it determined that the bond claims were clearly outside its jurisdiction. The commission explained that ‘cases of this description were not included among the unsettled claims that had received the cognizance of the Governments or were designed to embrace within the provisions of the Convention, and were, therefore, not within the jurisdiction of the Commission’.30

B. Odious debt Costa Rica and the Tinoco Arbitration In the Tinoco Arbitration, arbitrator Taft examined the validity of a sovereign bond issued under the dictatorship of Frederico Tinoco.31 After Tinoco fled Costa Rica in 1919, the restored government issued the Law of Nullities No. 41 invalidating all his debt transactions. Only twenty states had recognised the Tinoco government, excluding the United States, Great Britain, France and Italy. Notwithstanding, Great Britain argued that Costa Rica was bound to pay the bonds held by the Royal Bank of Canada. Costa Rica responded that the Tinoco government was neither a de facto nor a de jure government which could bind the nation.

27

28

29

30

Holford v United States (Great Britain v USA); Dawson v United States (Great Britain v US); G. Olivares Marcos, ‘The legal practice of the recovery of state external debt’, PhD thesis (University of Geneva, 2005), 105ff. An Act of Congress of 28 February 1855 provided that ‘the Secretary of the Treasury should pay to the creditors of the late Republic, who held such bonds, or other evidences of debt for which the revenues of the late Republic were pledged’. E. Borchard, State Insolvency and Foreign Bondholders: Vol. 1, General Principles (New Haven: Yale University Press, 1951), 267. Critical, J. Westlake, International Law (Cambridge University Press, 1910), vol. 1, 77–78, relying on R. H. Dana in the latter’s edition of Wheaton’s Elements of International Law (Boston: Little Brown, 1866), 30, n. 18. 31 Moore, Arbitrations, vol. 4, 3593. Tinoco Arbitration (Great Britain v Costa Rica).


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The sole arbitrator, US Chief Justice Taft, refused to give effect to the law of nullity in international law. After stating the principle that a change of government did not affect a state’s international obligations, he dismissed the contention that Tinoco had not been a de facto government. Tinoco did in fact exercise sovereign powers over Costa Rica without substantial resistance for most of his reign.32 Costa Rica’s argument that Tinoco assumed power in violation of the old constitution must fail. If international law were indeed to require compliance with internal constitutional law, then no revolution could ever upset the fundamental rules of the political game. On Costa Rica’s second contention that the revolutionary origin of the Tinoco government and the ensuing non-recognition implied that the Tinoco administration was not a de jure government under international law, the arbitrator held that international law did not refuse recognition on the basis of the regime’s constitutional illegitimacy. Finally, Great Britain was also not estopped by its earlier refusal to recognise the Tinoco administration and could claim in respect of its citizens’ rights. If the case ended there, it would have been unspectacular. Yet, at the very end of the award, the arbitrator qualified the debt in question as ‘odious’. Costa Rica was not obliged to repay the Tinoco loans. These borrowing transactions, apparently intended for Tinoco’s personal expenses and retirement, were not transactions of ‘an ordinary nature’ but ‘full of irregularities’.33 Since 2004, the extent to which the doctrine of odious debt may be utilised in municipal or international law has given rise to a vigorous debate.34 In Jarvis, the tribunal declined jurisdiction on the grounds that services for which the bonds were issued were provided to a temporary dictator in an unsuccessful revolution.35 Since Royal Bank of Canada knew about the illegitimate purposes of the loans, the bank, and not Costa Rica, had to bear the loss. But the holding is narrow. The reason why Costa Rica did not need to repay the loans was not the illegitimacy of Tinoco’s government under international law. Rather, it was because of the lending bank’s knowledge 32 34

35

33 Ibid., 154. Ibid., 168. J. King, ‘Odious debt: the terms of the debate’, NCJILC, 32 (2007), 606–68 provides an exhaustive overview; two noteworthy proposals are M. Kremer and S. Jayachandran, ‘Odious debt’, AER, 96 (2006), 82–92 and M. Gulati, L. Buchheit and R. B. Thompson, ‘The dilemma of odious debt’, Duke Law Journal, 56 (2007), 1201–62. Jarvis v Venezuela (US v Venezuela).

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that the sole purpose of the loans was personal.36 Without such knowledge, Costa Rica would have been under an obligation to service the loans.

French Claims against Peru Another state-to-state arbitral award before the Permanent Court of Arbitration is French Claims against Peru, which rejected a plea that Peru’s debt was null and void on the grounds of a change in its constitutional regime.37 France exercised diplomatic protection on Peruvian bonds on behalf of Dreyfus Fre`res & Cie and other creditors. France and Peru signed a Protocol on 2 February 1914 which submitted the case to arbitration. The British government, by contrast, never exercised diplomatic protection for its holders of Peruvian debt. Feis notes that ‘[w]ith war and revolution, Peru’s financial condition grew worse . . . the really distressed government was not pushed’.38 In August 1869, Peru had sold two million tons of guano to Dreyfus Fre`res & Cie and granted the banking house a monopoly for the resale of guano in Europe and French colonies as collateral for a loan.39 In exchange, Dreyfus advanced Peru the necessary funds to service a maturing loan. Disputes arose as to the interpretation of those contracts. Initially, Dreyfus brought these claims before Peruvian courts. A war between Peru and Chile in 1879 brought the Peruvian dictator de Pie´rola to power. Dreyfus authorised Pie´rola to settle the outstanding contractual disputes. Pie´rola fixed the sum due to Dreyfus at 17 million Peruvian soles or £3.2 million (£4 billion, £330 million). At the time, the Peruvian Court of Accounts approved this decision. When democracy returned, an 1886 Act of Congress declared all acts of the Pie´rola government to be null and void.40 The successor government refused to pay Dreyfus anything. In 1912, the Peruvian parliament authorised the government to submit 36 37

38 39

40

Gulati, Buchheit and Thompson, ‘The dilemma of odious debt’, 17. ¨ nch, ‘French–Peruvian Claims French Claims against Peru (France v Peru); F. Mu Arbitration’ in EPIL, vol. 2, 106–07. H. Feis, Europe the World’s Banker 1870–1914 (Yale University Press, 1931), 107. G. R. Delaume, ‘The proper law of loans concluded by international persons: a restatement and forecast’, AJIL, 56 (1962), 63–87, 64, note 4, W. Wynne, State Insolvency, 168–70; G. Watrin, Essai de construction d’un contentieux international des dettes publiques (Paris: Sirey, 1929), 212–15; H.-M. Imbert, Les Emprunts d’e´tats étrangers, recours individuels et action collective des creánciers (Paris: A. Leclerc, 1905), 55ff. This is the law of nullities which the tribunal in the Canevaro Brothers Case deemed inapplicable.


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the case to the Permanent Court of Arbitration, subject to the proviso that any payments could not exceed a lump sum of 25 million francs. In 1901, creditors failed to obtain relief through arbitration against Peru before the Franco-Chilean arbitral tribunal.41 The tribunal was composed of three Swiss judges. The guano guarantee did not create an effective security interest under Peruvian law. One creditor argued instead that the proper law of contract was international law, rather than Peruvian law, and amounted to ‘un droit reél identique a` l’hypothe`que et consacre´ par le droit des gens’.42 But the tribunal disagreed, finding that only contracts between states could be governed by international law, and consequently denied the existence of an effective security under Peruvian law.43 The difficult question of priority of payment under a Chilean decree of 1892 came to arbitration. All creditors of Peru secured on the guano could be determined by arbitration. But Dreyfus refused arbitration, with the French government exercising diplomatic protection, on the grounds that because Pie´rola recognised their claims, they alone were entitled to the proceeds of the guano.44 Peru demurred, insisting that she had liberty to assign a fund at the Bank of England to the bondholders alone. The Bacourt-Erra´zuriz Protocol of 23 July 1892 appointed the President of the Swiss Supreme Court as arbitrator. The core issue in the arbitration was which creditors had a right to be satisfied out of the fund.45 After detailed analysis of each claim, the tribunal found with one exception that no preferential rights in the fund existed. Nine out of thirteen claimants were declared inadmissible. Dreyfus Fre`res and three other claimants shared in the fund pro rata in accordance with the value of their claims.46 In order to re-access the French capital market, which required explicit authorisation by the French finance minister, Peru was negotiating at that time with several Parisian banks. Since the necessary

41

42

43

44

Bacourt-Erra´zuriz Protocol, Santiago, 23 July 1892; Arbitral Award of Rapperschwyl, 5 July 1901; E. Descamps and L. Renault, Recueil international des traite´s du XXe sie`cle, contenant l’ensemble du droit conventionnel entre les États et les sentences arbitrales (Paris: Arthur Rousseau, 1904–1921), vol. 7, 188–427; Watrin, Essai de construction, 232–36. Ibid., 370, 252–53; J. J. A. Salmon, Le Roˆle des organisations internationales en matie`re de preˆts et d’emprunts: proble`mes juridiques (London: Stevens & Sons, 1958), 26. Watrin, Essai de construction, 370. Compare the statement ‘any contract which is not a contract between states in their capacity as subjects of international law is based on the municipal law of some country’ in Serbian Loans and Brazilian Loans, 41. 45 46 Wynne, State Insolvency, 151. Ibid., 164. Ibid., 166.

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authorisation was impossible to obtain as long as Peru was deemed to be in default to French creditors,47 these arrears had to be cleared. Consequently, the Peruvian government agreed that 25 million francs of the proceeds of the proposed loan could be used to satisfy outstanding claims by French creditors. Yet the Peruvian Congress subsequently refused to approve the loan and the protocol for arbitration. However, the 25 million francs contained in that original protocol defined the resource envelope for future arbitrations. The Hague tribunal held that Peru was bound to repay the foreign loan.48 Acts of the Pie´rola government bound the successor government as far as foreigners were concerned. The tribunal relied on apparent support for the Pie´rola dictatorship by large sections of the Peruvian population, including backing by the National Assembly and various plebiscites. The reasoning of the tribunal alluded to the odious debt doctrine, and is similar to the Tinoco Arbitration. One element the Tinoco tribunal took into account is the odious character of funds destined for the personal use of a former ruler. Pie´rola also exercised the legislative, executive and some judicial powers for a sustained period of time. For instance, the court took note that France, England, Germany and Belgium recognised Pie´rola’s government. In dismissing the successor government’s contention that the de facto character of the Pie´rola government in conjunction with the 1886 Law implied nullity, the tribunal pointed to recognition of the Pie´rola government by many states and in some court rulings. Several judgments found that the Pie´rola government represented and bound Peru.49 The arbitral tribunal declared that the law of nullity could not be applied to foreigners who had contracted with the Pie´rola government and, hence, Peru in good faith. For that reason, Pie´rola had conclusively and finally settled the debt. A successor government could not simply unravel this deal. The sum awarded by the Franco-Chilean Tribunal, as well as a number of smaller claims by the same tribunal, had to be deducted from the lump sum. Interest at 5 per cent was due from the respective due dates. By contrast, the tribunal declined the French claim for compound interest.

47 49

48 Ibid., 169. Award, 11 October 1921, AJIL, 16 (1922), 480. Republic of Peru v Dreyfus Brothers & Co. (1888) L.R. 38 Ch. D. 348 (23 February 1888); Court of Appeals of Brussels, 10 July 1888, XLVI La Belgique Judiciaire, 1218 (1888); Franco-Chilean Arbitral Court, Award of Lausanne, 5 July 1901, Tribunal Arbitral Franco-Chilien (1901), 288.


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An obligation to pay compound interest could result only from unambiguous evidence that the debtor government consented to such an onerous obligation. In this case, Peru did not assume such obligation. In addition, had the French government initially thought of compound interest, which would have substantially increased the debt, it would have demanded a higher lump sum than 25 million francs in final settlement. When Peru maintained that it was incapable of paying the arbitral award, the French government exercised pressure by refusing to list any Peruvian loans in France until compensation to Dreyfus had been paid in full.50

Universal Postal Convention arbitration In Dues for Reply Coupons Issued in Croatia, an arbitral tribunal organised under the Universal Postal Convention examined the question whether the Portuguese Postal Administration could seek payment of reply coupons issued to the independent state of Croatia during German occupation in World War II for transit through Portugal.51 Yugoslavia refused payment on the grounds that the Portuguese Postal Administration issued these coupons to a wartime puppet state under direct German control. Hence, any recognition of the debt by the occupied postal administration could not bind it as the successor state since it had never recognised German rule over Croatia’s territory. While the tribunal affirmed jurisdiction and the existence of the claim in principle, it held that it lacked jurisdiction to examine the central question whether Yugoslavia was responsible for debts contracted under occupation. The tribunal noted that the Universal Postal Convention provided no guidance on this matter. Recourse to general international law or special international agreements clearing the consequences of war became necessary. Despite the jurisdictional limitation it had underscored moments earlier, the tribunal then gave its own interpretation of general international law. The creditor lacked the power to replace the original debtor (Croatia) with another entity which it considered to be the rightful successor, unless a special international agreement or an uncontested

50 51

Wynne, State Insolvency, 169; Borchard, State Insolvency, Vol. 1, 253. Re Dues For Reply Coupons Issued in Croatia (Portugal v Postal Administration of Yugoslavia).

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rule of international law recognised the successor. On this basis, the tribunal refused to award compensation to the Portuguese Postal Administration.

Ecuador’s audit of sovereign debt The Ecuadorian Constitutional Court upheld the validity in 2009 of an ex aequo et bono arbitration clause in a public loan agreement, even though Article 190 of the Ecuadorian Constitution only allows the submission to arbitration in law.52 Arbitration in equity is excluded. The loan agreement at issue was between the Inter-American Development Bank and Ecuador. Ecuador’s Attorney General objected to the clause on the grounds of Article 190. The legal adviser to the President then requested a legal opinion from the court. The Constitutional Court held that Article 190 applied in the domestic sphere only. It ruled that arbitration in international contracts such as the one with the IBRD loan were governed by Article 422. The final paragraph of that article provides that Ecuador will promote arbitration on sovereign debt under ‘principles of equity, transparency and international justice’ and take account of ‘the origin of the debt’, inserted in 2007. In 2007, President Correa created a commission to investigate the origin of Ecuadorian debt. The commission’s task was to investigate whether some debts need not be repaid because they were ‘illegitimate’ or ‘odious’.53 The commission found substantial irregularities with some of Ecuador’s debt issued since 2000. Ecuador deliberately defaulted on two of its bonds at the end of 2008 – it was expressly not invoking its inability to pay the debts, but challenged the bonds’ legality. The move raised concerns in financial markets that Ecuador could offer a model to other debtor governments, leading to a string of voluntary defaults. A total of 91 per cent of holders of the two bonds accepted the option of new debt instruments, with a two-thirds haircut – a substantially higher percentage than in Argentina’s 2005 restructuring with 77 per cent. In July 2009, Ecuador denounced the ICSID Convention under Article 71 of the Convention. Ecuador may have been concerned not only about a series of ICSID arbitrations relating to natural resources,54 but also 52 53

54

IBRD Opinion, Ecuador (2009). ´ blico, Informe de la subcomisioń jurı´dica, ń de Auditoria Integral del Cre´dito Pu Comisio 23 September 2008. Occidental v Ecuador; Chevron v Ecuador; Burlington v Ecuador; Perenco Ecuador Limited v Ecuador; Murphy v Ecuador; Repsol v Ecuador.


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about possible challenges to its default and restructuring at ICSID, following in the footsteps of Argentina’s bondholders. No such arbitration by bondholders at ICSID materialised. The offering documents for Ecuador’s 2009 restructuring alerted holders to the impact unfavourable awards could have on Ecuador’s ability to pay.

C. Payment capacity in arbitration Germany’s three-decade long restructuring, 1918–1953 Article 233 of the Treaty of Versailles created an Inter-Allied Commission (the Reparation Commission) to determine the amount of the damage for which compensation was to be made by Germany for loss and damage suffered by the Allies and Associated Governments during World War I. In April 1921, the Reparations Commission decided that the amount of damages on account of reparations was 132 billion gold marks – an amount considered to be unrealistic in view of Germany’s economic and financial condition at the time.55 The reparations problem was complicated and aggravated by German hyperinflation, ended only by a currency reform that equated one mark to 1 trillion Reichsmarks. On 30 November 1923, the Reparations Commission created two Committees of Experts to establish Germany’s resources and its capacity to pay. The first committee, charged with the budget and currency stabilisation, was headed by Charles G. Dawes. The Committee produced the Dawes Plan which provided for a reduction in reparation payments by several means, including the issue of a large external loan. At a conference in London in July–August 1924, the London Protocol was adopted to put the Dawes Plan to work as from 1 September 1924.

The Dawes Loan As part of the settlement of war reparations, two sets of bonds were issued by Germany. Both were guaranteed by treaty. The first was the Dawes Loan, a 25-year, 7 per cent bond issued in October 1924 in Belgium, France, Germany, Great Britain, Holland, Italy, Sweden, Switzerland, and the United States of America in various currencies, for a total of 800 million gold marks at the then current rate of exchange (or US$ 190 million). It matured in October 1949. The Dawes Loan was 55

J. M. Keynes, The Economic Consequences of the Peace (London: Macmillan, 1919).

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secured by mortgage on all reparations payments and by oversight over revenues from customs, tobacco, spirits and sugar. In 1924, Europe governments issued sovereign debt totalling $440 million in the United States, 60 per cent of the total borrowing by foreign entities in the United States that year.56 The extra yield on foreign government securities was at least two per cent.57 The Dawes Loan of $110 million accounted for one quarter of the total. Historians by and large agree that the Dawes Plan weakened the French position in Europe.58 In 1923–24, France had itself become heavily dependent on external finance, and was particularly susceptible to subtle pressure from Washington and London to agree to a sustainable long-term solution for German war reparations. France had no alternative due to its economic crisis but to seek an international settlement along the lines of the Dawes Plan.59 When the Dawes Plan failed to durably improve Germany’s financial position, the major creditors set up a committee of independent financial experts to come up with a proposal for a complete and final settlement of German reparations, with Owen D. Young as chairman. After meetings at The Hague in August 1929 and January 1930, the governments concluded the Hague Agreements, with the intention to provide a final settlement of the reparations problem. The governments put into motion the Young Plan, based on the Report of the Group of Experts. The Hague agreements comprised fourteen instruments, including the tenth entitled ‘Arrangements as to the Financial Mobilisation of the German Annuities’. That instrument provided for the issuance of bonds, later to be known as the Young Loan. The Hague Agreements entered into force on 17 May 1930 with retroactive effect as from 1 September 1929.

The Young Loan and the BIS The Young Loan created the Bank for International Settlements with the purpose of moving from the political problems created by reparations towards a financial solution.60 The way to achieve this objective was through commercialisation, the assimilation of the obligation as closely 56 57 58 59

60

H. Feis, ‘The export of American capital’, Foreign Affairs, 3 (1925), 668–86, 671. Ibid., 673. D. Fleck, ‘Dawes Plan (1924) and Young Plan (1930)’, in MPEPIL. S. A. Schuker, The End of French Predominance in Europe: The Financial Crisis of 1924 and the Adoption of the Dawes Plan (University of North Carolina Press, 1976). See Article 233, Versailles Treaty.


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as possible to an ordinary commercial obligation, by way of a public bond issuance.61 Under the plan, the German government issued a general bond – the Young Loan – in nine different currencies. The Bank for International Settlements was created to act as trustee for the payment of German war reparations commercialised through the Young Loan, with the power of interpreting its terms.62 It was designed to assure German debt payments to Young loan creditors preferentially over other private creditors. The reparation debts by Germany to the creditor countries were to be paid by annuities under a specified payment schedule from 1929 to 1988. The equivalent of 600 million Reichsmarks per year in foreign currencies was to be an unconditional payment obligation without any possibility of postponement, to service the German External Loan of 1924. The remainder of the annuities were subject to a postponement of transfers and of payments if required. Germany committed itself to retaining the convertibility of the Reichsmark into gold. The Arrangement as to the Financial Mobilisation of the German Annuities was signed as one of the Hague Agreements in January 1930. It provided for the issuance on international markets of one or more tranches of bonds with an aggregate value of $300 million by the BIS. The reparation creditors were to receive two-thirds of the proceeds, and the German government one-third. The BIS acted as trustee for the bondholders. The Paris Agreement, signed on 10 June 1930, approved the terms of the General Bond for the Young Loan. The BIS was empowered to approve the Definitive Bonds as set out in the General Bond. Article 5 of the Paris Agreement preserved the priority in favour of the German External Loan. Article 6 contained three guarantees for bondholders: (i) a gold value guarantee, (ii) a nominal value guarantee, and (iii) a currency option guarantee. The 5.5 per cent Young Loan was issued in June 1930, and set to mature in June 1965. The security for the Young Loan consisted in an annual 660 million mark tax on the German Railway Company for a period of 37 years. Debt service was to be paid to the Bank for 61

62

Committee of Experts on Reparations and Owen D. Young, Report of the Committee of Experts on Reparations (London: HMSO, 1929), paras. 148 and 149. Hague Agreement, 20 January 1930; D. Vagts, ‘International economic law and the American Journal of International Law’, AJIL, 100 (2006), 769–82, 777; G. Toniolo, Central Bank Cooperation at the Bank for International Settlements, 1930–1973 (Cambridge University Press, 2005), ch. 1; B. A. Simmons, ‘Why innovate? Founding the Bank for International Settlements’, World Politics, 45 (1993), 361–405.

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International Settlements.63 In contrast to the Dawes Plan, it fixed the volume of German reparations definitely at 110 billion Reichsmarks. Germany defaulted in 1934 after Adolf Hitler had assumed power, at a time when it had paid about 3.7 billion gold marks in reparations.64 Arbitration plays a prominent role in the BIS Charter. Any dispute between the signatory governments, or any signatory and the BIS, may be referred to a special arbitral tribunal that succeeded to the arbitral tribunal under the London Agreement of 30 August 1924.65 Annex 12 contains detailed rules of procedure. Even while the Young Plan was being drafted and the bonds were being issued, the general economic situation was worsening. As the Depression deepened, the weight of intergovernmental debt bulked larger and obstructed economic recovery. In September 1931, the Bank of England suspended gold payments. Sweden followed the same month. Germany continued to service its debts until 30 January 1933. The Third Reich first reduced its payments, and then from 13 June 1934 suspended interest payments altogether.66 As a result of transfer agreements concluded between Germany and various governments, certain groups of bondholders received preferential payments, the equivalent of five-sixths of the nominal amounts due. The German government offered to liquidate outstanding balances by payment in Reichsmarks with respect to certain bondholders. The BIS did not participate in any of these transfer agreements, and deemed them to be incompatible with the General Bond and the related international treaties. The United States did not enter into a transfer agreement. Its bondholders suffered as a result. Germany offered to purchase due interest coupons with a haircut of around 30 per cent. Germany paid interest on the Dawes and Young loan until the onset of World War II in 1939, though it had demanded a multi-year moratorium as early as 1934.67 On 9 June 1933, the Reichsbank announced a moratorium on transfers, but creditor pressures led to a settlement that held out the promise of a resumption of interest payments on the Dawes and Young loans. 63

64

65 66 67

J. P. Young, European Currency and Finance (Washington, DC: US Government Printing Office, 1925), 430. H. van Houtte et al., Post-war Restoration of Property Rights under International Law (Cambridge University Press, 2008), 318. M. O. Hudson, ‘The Bank for International Settlements’, AJIL, 24 (1930), 565. Annual Report of the Trustees for the year April 1935–March 1936. Wall Street Journal, 1 September 1934.


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The Anglo-German Payments Agreement of 1 November 1934 was a critical element in avoiding a default. Under that Agreement, the Bank of England gave a major loan to Germany and became Germany’s most important creditor. In return, Germany would continue to pay the interest on both loans in full.68 But soon, only 75 per cent of interest was paid on other debt.69 And amortisation payments on the Young Loan were not to be transferred.70 Germany started buyback operations at depressed prices on the secondary market that lasted at least until 1941.71 The implications of a potential German default were extremely serious. British Chancellor Chamberlain was plagued by ‘[h]orrible possibilities of a German default and the consequent bankruptcy of some of the great English financial firms [which] have been hanging over me ever since I took office and just lately they have been very menacing’.72 From 1930 to 1938, the price of German debt collapsed, from 90 per cent in 1930 to as little as 16 per cent in 1939. In 1939, The Economist gloomily noted: ‘German bonds, even in peace time, were distinctly dubious investments, and the fact of war has entirely justified the distrust with which they have long been regarded.’73 The question of Germany’s international indebtedness became a major element of German economic reconstruction after World War II at the London Debt Conference in 1953. The largest and most comprehensive multilateral debt restructuring conference in financial history played a crucial role in allowing the newly democratic Federal Republic of Germany a fresh start.

The London Debt Conference in 1953 By an agreement made on 6 March 1951, the Federal Republic of Germany confirmed its liability for pre-war external debt of the German Reich. It noted its understanding that regard would be had to its changed boundaries and its capacity to pay. It committed itself to reaching a settlement with creditors in the shortest possible timeframe. 68

69 70 71

72

73

W. O. Brown and R. C. K. Burdekin, ‘German debt traded in London during the Second World War: a British perspective on Hitler’, Economica, 69 (2002), 655–69, 662. C. R. S. Harris, Germany’s Foreign Indebtedness (Oxford University Press, 1935), 54–55. Ibid., 52. A. Klug, The German Buybacks, 1932–1939: A Cure for Overhang? (Princeton, NJ: Princeton Studies in International Finance, No. 75, 1993), 20. Quoted from N. Forbes, ‘London banks, the German standstill agreements, and economic appeasement in the 1930s’, Economic History Review, 40 (1987), 571–87. The Economist, 9 November 1939, 177.

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In April 1951, France, the UK and the United States set up the Tripartite Commission on German Debts to act on their behalf in the forthcoming consultations and negotiations. Importantly, their governments also agreed on the participation of private creditors in the forthcoming negotiations. In December 1951, the Tripartite Commission on German Debts informed the German delegation of their concessions. France, the UK and the United States proposed haircuts of between 62 and 75 per cent of their claims, including interest. This sovereign debt restructuring put the Federal Republic on a sound financial footing by liquidating a range of claims against the defunct Reich.74 The London Debt Conference opened on 28 February 1952. Twenty-two creditor countries sent national delegations composed of governmental and, in many cases, private creditor representatives. France, the UK and the US indicated that they were prepared to waive the priority of their claims for post-war economic assistance to Germany and to sacrifice very large amounts of those claims if an equitable and reasonable debt settlement could be agreed upon with respect to Germany’s pre-war debts. Under the London Debt Agreement, creditors under the Dawes and Young Loans received much more favourable treatment than Germany’s other outstanding commercial debt.75 Secondary market values for Dawes and Young loans rallied in anticipation of a favourable post-war debt settlement. The Economist noted cheerfully: ‘German bonds have given market operators an exciting and, on the whole, a profitable run for their money.’76 The negotiators had taken the lessons from the failure of the war reparations regime under the Versailles Treaty to heart. The terms of the German Debt Agreement were highly concessionary – Germany received much debt relief (a large haircut). The Agreement marked a watershed in international finance for its emphasis on how much Germany was able to pay, in contrast to how much she was legally obliged to pay.77 The German debt settlement is the only occasion in history when the whole external debt, sovereign and private, of a major industrial state has been reorganised in one unified operation. While this was an international conference, there were major differences from the typical

74

75 77

D. Vagts, ‘Sovereign bankruptcy: In re Germany (1953), In re Iraq (2004)’, AJIL, 98 (2004) 302–06. 76 Klug, German Buybacks, 667. The Economist, 16 August 1952, 409. G. R. Delaume, Legal Aspects of International Lending and Economic Development Financing (New York: Dobbs Ferry, 1967), 53.


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intergovernmental treaty negotiation. The negotiations were carried out principally between the representatives of private creditors on the one hand and the German delegation acting as the representatives of the debtor on the other hand. These private representatives took no instructions from their governments.

Dawes Plan Arbitral Tribunal The jurisdiction of the Dawes Plan Arbitral Tribunal extended to any dispute relating to the interpretation of the Experts’ Plan.78 The core question in the seven arbitration cases before the tribunal was whether the German government had fully discharged its financial obligations through regular annuities under the Experts’ Plan, or whether additional payments were due.79 One of these awards involved close to $2 billion ($300 billion, $21 billion) at 1927 prices. Fischer Williams commended the Dawes Tribunal for settling economic disputes of such magnitude reasonably, objectively and quietly.80 In the Commissioner of Controlled Revenues Case, the Dawes Plan Arbitral Tribunal held that creditor consent to any reduction of assigned revenues was a natural feature of international financial control, even when a reduction would not affect the volume of revenues.81 The debtor government could not unilaterally change the internal composition of revenue assignments, notwithstanding uninterrupted debt service. In the Social Insurance (Upper Silesia) Case, the Dawes Plan tribunal affirmed that the Experts’ Plan established the payment envelope for German transfers abroad.82 It thus disagreed with the Reparation Commission representing Allied creditor governments, which maintained that social insurance funding under Article 77 of the Treaty of Versailles over and above the Experts’ Plan was due. According to Article 234 of the

78

79

80

81

82

Agreement between the Reparation Commission and the German Government, 9 August 1924 and Agreement between the Allied Government and the German Government, 30 August 1924. E.g. Dawes Award II (1927) and Award III (1928); M. Schoch, Die Entscheidungen des Internationalen Schiedsgerichts zur Auslegung des Dawes-Plans (Berlin: W. Rothschild, 1927). J. Fischer Williams, ‘The tribunal for the interpretation of the Dawes Plan’, AJIL, 22 (1928), 797–802, 799. Dawes Plan Interpretation (Commissioner of Controlled Revenues) Case, 23 June 1926, Arbitration under Article 14 of the Protocol Annexed to the London Agreement of 9 August 1924. Reports of the Committee of Experts ‘Settlement of the reparation problem’, 7 June 1929, AJIL Supp., 24 (1930), 81.

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Versailles Treaty, ‘[t]he Reparations Commission shall . . . from time to time, consider the resources and capacity of Germany, and . . . shall have discretion to extend the date, and to modify the form of payments’. Germany contended that these payments were comprised in the Plan’s general annuities. One distinguishing feature of the Dawes Plan tribunal is that it was given the power to make declaratory awards.83 The arbitrator sided with Germany. While not overlooking Germany’s legal obligations, the tribunal paid particular attention to the economic and financial aspects of the Experts’ Plan. The principle underlying the Plan was that Germany’s obligations under the Plan were one unified obligation and hence the planned annuities represented the maximum payment that could be extracted from Germany without jeopardising its ultimate success. Poland argued similarly to the Allied governments, namely that the social insurance funds transferred for the benefit of Upper Silesia were not comprised in the general annuities. Crucially, it relied on the additional argument that the Plan could not bind Poland legally, as res inter alios acta, given that Poland was not a party to the Versailles Treaty. The tribunal dismissed this contention, emphasising that transfers to Upper Silesia and Alsace-Lorraine were on an equal footing under the philosophy of the Experts’ Plan. After highlighting the purpose of the plan, which was ‘to organise machinery capable of obtaining from Germany maximum annual payments’, the tribunal went on to state that the experts took great care to ensure equality of treatment between the Allied and Associated Powers, such as Poland.84 As a result, the Versailles Treaty bound even third parties. The tribunal gave tangible effect to equal creditor treatment. By contrast, in Gologan v Germany, the Roumano-German mixed arbitral tribunal refused to hand down merely declaratory remarks without executability. Germany contended that due to the existence of the Dawes Plan, and hence its limited present capacity to pay, the tribunal should merely declare the amount payable under Article 297(e) of the Versailles Treaty, without execution.85 However, the tribunal ordered Germany to pay the amount due.

83 84

C. Jenks, The Prospects of International Adjudication (London: Stevens & Sons, 1964), 418. 85 Social Insurance (Upper Silesia) Case. Gologan v Germany.


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Arbitral Tribunal for the Agreement on German External Debt In Switzerland v Federal Republic of Germany, the Arbitral Tribunal for the Agreement on German External Debt clarified the scope of debts falling under the London Debt Agreement (LDA). Annex II, Article V, paragraph 3 of the LDA provided for a particularly favourable conversion rate for claims of ‘such financial debts and mortgages, expressed in Gold Marks or in Reichsmarks with a gold clause, as had a specific foreign character’. Annex XII, section I, paragraph 2(a) similarly included debts under the scope of the Agreement only insofar as it was ‘expressly agreed under the original written debt agreement that the place of payment . . . is abroad’. A Swiss company acquired land from a German company, and sold on the land to another German company in 1931. The sales contract referred twice to the headquarters in Switzerland and provided that interest and principal payments were to be made on the total purchase price ‘free of charge to the vendor or to a pay office to be specified by it’. The question was whether this contractual proviso for payments gave the contract ‘a specific foreign character’. The contract contained no express provision for the place of payment. The Federal Republic of Germany objected that the tribunal lacked jurisdiction over disputes between private parties, on the grounds that the case did not concern the state parties to the LDA. The tribunal unanimously affirmed its jurisdiction. It explained that the case did not concern a private dispute, but the interpretation of annexes to the Dawes Agreement. Switzerland was not seeking damages for its bank, but appealed to the tribunal to shed light on the correct interpretation. By five to four, the tribunal held that the place of payment was where creditors were in fact entitled to receive payment (Switzerland) and hence abroad, not the place where the debtor took preparatory steps to payment.86 The tribunal found this to be a rule of public international law, rather than resulting from the lex contractus, which was German law. Under German law, the place of payment would have to be determined. But the tribunal reasoned that it could not have been the drafters’ intention that the LDA’s scope of coverage differed depending on the governing law. The tribunal sidestepped the need for such

86

Switzerland v Germany, 363–67; F. A. Mann, ‘The proper law of contracts concluded by international persons’, BYBIL, 35 (1959), 34–57, 37, 40 (an ‘unfortunate’ decision).

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determination by holding that the unambiguous intention of the parties was that the place of payment was abroad. Hence the obligation fell under the scope of the LDA. The minority called for the application of the lex contractus, referring to the rationale behind the LDA’s preferential conversion rule. Given that the transaction’s centre of gravity under the applicable German law was in Germany, this was not an obligation of a ‘specific foreign character’. This provision ought to be construed strictly, because the drafters intended that preferential conversion should only apply in exceptional circumstances given the limited funds available for distribution to creditors. In Claims re Decisions of the Mixed Greco-German Arbitral Tribunal, the question was whether Greek claims arising out of decisions of the Greek–German mixed claims commission under the Treaty of Versailles were settled under the London Debt Agreement of 1953. The Arbitral Tribunal for the Agreement on German External Debt found that the London Debt Agreement provided for a differentiated regime of settlements, which did not contravene the non-discrimination principle under international law. The Greek claims were sui generis. It also held that Greece and Germany were under an obligation to try to negotiate a settlement of the claims in good faith.87

Itoh v People’s Republic of the Congo In an arbitration case before the International Chamber of Commerce, the People’s Republic of the Congo defended its non-payment under a contractual guarantee on the grounds of the disequilibrium in its balance of payments.88 The arbitration was based on a sales contract for machinery entered into between the People’s Republic of the Congo and C. Itoh Middle East. That contract gave rise to a loan by the seller that was reflected in promissory notes guaranteed by the Ministry of Finance. The contract contained a broad waiver of sovereign immunity and provided for arbitration before the International Chamber of Commerce. The country did not contest the validity of the guarantee, but rather advanced its difficult financial position and the consent of official and private creditors to a restructuring agreement in the Paris and London Clubs. The country further argued that it had entered negotiations with all other creditors in the ‘Congo Club’ in its own capital. Individual 87 88

Claim re Decisions of the Mixed Greco-German Arbitral Tribunal (1972). Itoh v People’s Republic of the Congo (ICC).


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creditors, the country maintained, were bound by the terms of the debt restructuring elaborated with the international financial community. A commentator noted that the country had successfully demonstrated the gravity of its external and internal sovereign indebtedness and its inability to make any sizable payments on its debts for a number of years.89 Yet single arbitrator Fouchard did not accept Congo’s argument. Even though he recognised in principle a duty of sovereign creditors to cooperate in sovereign debt restructurings, demanding payment on a sovereign debt obligation after several unsuccessful attempts to restructure debts did not violate that duty. The arbitrator also rejected the contention that the Paris Club principle of equal treatment prevented the country from concluding a specific payment agreement with an outside creditor. This was especially true since the People’s Republic of the Congo had renounced all immunity from jurisdiction or execution. He concluded that despite its reasonableness, the sovereign debt restructuring of developing countries did not constitute a custom of international commerce binding all creditors.90 The arbitrator paid little attention to the country’s difficult financial position. This award demonstrates the inability of countries in current international law to bind all creditors to a restructuring agreement, even if such agreement is reached in the Paris Club. Third parties are not bound by that agreement. The award brings legal and policy considerations of litigation by non-participating creditors on sovereign debt instruments into sharp relief.91 The dispute then shifted to national courts. The People’s Republic of the Congo first applied to have the arbitral award set aside. The Court of Appeal of Paris rejected that application on the grounds that the onemonth statutory period had expired.92 The next episode occurred in US courts. Itoh had in the meantime assigned their interest in the claim to National Union Fire Insurance Company of Pittsburgh. The latter sought recognition of the foreign judgment in Oklahoma, which was duly granted.93 89

90 91

92 93

Y. Derains, ‘Cour internationale d’arbitrage de la CCI : chronique des sentences arbitrales’, JDI, 117 (1990), 1047–56, 1047. Ibid., 1050. Litigation by non-participating creditors on sovereign debt figures prominently in Chapters 6 and 8. Itoh v People’s Republic of the Congo (Paris, 1999). Itoh v People’s Republic of the Congo (Oklahoma County, 2004).

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The claimants then sought attachment, among others, of Congo’s top-level domain ‘.cg.’ from the Internet Corporation for Assigned Names and Numbers (ICANN) in California. ICANN vigorously contested that it was not the proper defendant to this suit; that top-level domains were not property, and that in any event the domain was not located in the United States; that it acted merely as an administrator of the domains. In August 2007, the court stipulated the dismissal of the request for attachment with prejudice.94

FG Hemisphere v DRC A case with the Democratic Republic of the Congo (DRC) as defendant also illustrates the complex interaction between arbitral tribunals and national courts in the area of sovereign debt. FG Hemisphere acquired two arbitration awards amounting to $34 million in 2004 from Energoinvest, a Yugoslav company for an undisclosed sum (though presumably with a large discount). FG Hemisphere was a New York-based special purpose vehicle set up specifically for the purpose of holding this particular defaulted debt. Energoinvest had obtained arbitral awards against the Democratic Republic of the Congo under ICC rules in France and Switzerland.95 It sought enforcement under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards in Hong Kong, and to enjoin the transfer of assets allegedly due to it out of Hong Kong.96 The arbitration awards arose out of the building of hydro-electric facilities and associated credit agreements in the DRC in the 1980s. The credit agreement contained an ICC arbitration clause. FG Hemisphere sought the enforcement of the two arbitral awards in Hong Kong for $102 million. A particularly interesting twist to this litigation is that a large Chinese state-owned company found itself indirectly implicated in this litigation because it had concluded a major investment project in the DRC in 2008. Under that investment agreement, the Chinese Railway company owed more than $350 million in fees due for mineral exploitation in the DRC to a state-owned Congolese mining company which FG Hemisphere sought to attach. The DRC maintained in the Hong Kong litigation that the court lacked jurisdiction. It enjoyed absolute sovereign immunity, a position strongly 94 95 96

Itoh v People’s Republic of the Congo (Los Angeles, 2007). Energoinvest v DRC ($11.7 million and S22.5 million plus interest). FG Hemisphere v DRC, Hong Kong Court of Appeal (2009).


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supported by the Hong Kong Secretary of Justice and the Chinese Foreign Ministry as set out in a letter to the court.97 Even if restrictive sovereign immunity obtained in principle, its sovereign acts were implicated in this action. The Secretary of Justice also maintained that restrictive sovereign immunity was not customary international law, and hence not part of Hong Kong common law.98 The court of first instance declined jurisdiction and set aside leave to enforce the arbitral awards. On appeal, a two-to-one majority ruled that DRC benefited only from restricted sovereign immunity. After extensive discussion of the law on sovereign immunity in Hong Kong, the majority followed the ‘traditional view’ set out in R v Jones (Margaret) that customary international law becomes part of the common law by incorporation, because customary law is one of the sources of English law.99 It held that the generality of states subscribe to restrictive sovereign immunity,100 and affirmed the presence of opinio iuris. The arbitral award in this case, similar to Itoh v People’s Republic of the Congo, again demonstrates the difficulty of binding non-participating creditors to a sovereign restructuring. This difficulty tends to be even greater before international arbitral tribunals compared to national courts.

Bulbank v A.I Trade As UNCITRAL awards are confidential, it is unclear how many UNCITRAL awards have involved sovereign debt instruments. No sovereign debt cases under those rules of arbitration are available apart from one case, where one party to the arbitration unilaterally published the interim award. Bulbank v A.I. Trade is an UNCITRAL arbitration which concerned the repayment claim of a creditor who refused to participate in Bulgaria’s Brady-style restructuring.101 A.I. Trade Finance was the partial assignee of loans made by an Austrian bank to Bulbank. Bulgaria subsequently carried out a Brady-style restructuring issuing bonds in exchange for

97 99

100 101

98 Ibid., para. 90. Ibid., para. 28. Cf. R v Jones (Margaret), [2007] 1 AC 136, 155; R. O’Keefe, ‘The doctrine of incorporation revisited’, BYBIL 79 (2008), 7–85. FG Hemisphere v DRC, Hong Kong Court of Appeal (2009), para. 76. Bulbank v A.I. Trade; M. F. Rosenberg, ‘Chronicles of the Bulbank Case: the rest of the story’, J Int’l Arb, 19 (2002), 1–31.

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Bulbank’s outstanding loan obligations. A.I. Trade Finance did not tender into the exchange, but instead sued on the original loans. A.I. Trade Finance agreed to publish the interim awards in Mealey’s International Arbitration Report. The Swedish Supreme Court declined to find that this unilateral agreement to publish breached the company’s obligation of confidentiality.

8

Arbitration clauses in sovereign debt instruments

As long as absolute sovereign immunity closed national courts to sovereign creditors, arbitration rudimentarily filled the resulting gap in creditor protection. In the second half of the nineteenth century and prior to World War II, arbitration clauses in sovereign debt instruments were quite common.1 Once national courts started to hear sovereign debt cases, the need for such arbitration clauses declined. After World War II, these arbitration clauses became extremely rare. Modern sovereign debt instruments almost invariably submit to the jurisdiction of national courts in important financial centres. Today’s sovereign bonds rarely contain arbitration clauses. Brazilian government bonds, which occasionally incorporate UNCITRAL arbitration clauses, are the exception. They include arbitration clauses alongside providing for the jurisdiction of Brazilian courts because Brazilian law prohibits submission to external courts.2

A. Arbitration clauses before the twentieth century The Jay Treaty of 1794 created the first mixed claims commission to deal with Britain’s claims regarding ‘[d]ebts . . . which were bona fide contracted before the Peace’.3 It stipulated arbitration to settle debts 1

2

3

For the earlier use of arbitration clauses in Latin America, see J. Dolinger, ‘Solution of Latin-American external debt by international arbitration’ (1990), in Cursos de Derecho Internacional, Serie Tematica Vol. II, Parte 1: El Sistema Interamericano (1974–2001); M. Domke, ‘Arbitration clauses and international loans’, Arbitration Journal, 3 (1939), 161; E. Borchard, State Insolvency and Foreign Bondholders: Vol.1, General Principles (Yale University Press, 1951), 37–38. E.g. The Federative Republic of Brazil, Prospectus Supplement, 18 October 1999, USD 2,000,000,000, 14.5% U.S.-Dollar Denominated Unsecured Bonds Due 2009. Article 1, paragraph 6; A. M. Stuyt, Survey of International Arbitrations 1794–1989, 3rd edn (Dordrecht: Nijhoff, 1990), 9.

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incurred before the American Revolution, maritime claims, and the Maine boundary dispute with Britain. In the nineteenth century, arbitration clauses in sovereign debt contracts were quite common. A good example is Article 31 in the agreement to restructure Costa Rica’s external debt in 1884.4 The debt restructuring of Entre Rios province likewise provided for arbitration on whether special types of claims had received adequate consideration, so as to avoid delaying the implementation of the agreement or risk non-acceptance.5 Lord Rothschild acted as sole arbitrator.6 His task was to establish the conversion factor for special claims. The US President, the bank or Costa Rica was entitled to request arbitration. Should the Permanent Court of Arbitration cease to exist or operate, three arbitrators were to be appointed as foreseen in the agreement.7 The bank as trustee for the bondholders was also entitled to apply to the United States for protection. In Ecuador, consolidation agreements concluded in 1898 also called for arbitration. A newly created railway company purchased Ecuador’s entire debt and operated a railway concession for the benefit of bondholders.8 The amount of compensation for any property losses or damage was to be fixed by arbitration. Article 27 of the Agreement contained the following arbitration clause: All controversies or disagreements that may arise between the contracting parties, shall be settled by arbitration, one arbitrator shall be the President of the United States of America, and the other shall be the President of Ecuador; should they not wish to act, they will each name an arbiter, and should these not agree, then the said President of the United States of America, and the President of Ecuador will name a third arbiter to decide the question.

Upon Panama’s independence from Colombia, Panama declared itself willing to assume a just and equitable portion of Colombian’s external debt proportionate to its population as soon as Colombia recognised Panama’s independence. It noted that it had no legal duty to assume the debt, given that no borrowed funds had been employed for Panama’s benefit.9 The Corporation of Foreign Bondholders

4 7

8

9

5 6 CFB Rep (1885), 32–54. CFB Rep (1899), 71. Ibid., 74. Agreement between the Republic of Costa Rica and Messrs. Speyer & Co., New York, 18 May 1905. Agreement between the Guayaquil and Quito Railway Company and the Council of Foreign Bondholders, 27 October 1897. CFB Rep (1904–05), 87–88.

arbitration clauses in sovereign debt instruments

159

protested that Panama was willing to assume only 8 per cent, especially in view of the $10 million it had recently received from the United States for the Panama Canal.10 The Corporation suggested that President Roosevelt sit as arbitrator to determine Panama’s just and equitable share. Panama demurred. Payments by third parties were immaterial in such an equitable settlement on the basis of population. Arbitration by the US President was premature.11 Notwithstanding, the Corporation, by resolution, formally requested President Roosevelt to ‘act as arbitrator, as between the Government of Panama and the Bondholders, in determining what proportion of the Colombian External Debt should be assumed and paid by Panama’.12 Panama reiterated its stance that arbitration was premature as long as Colombia did not recognise Panama.13 The US Secretary of State emphasised that the President would only be able to arbitrate on the basis of a negotiated request formulated jointly by Colombia and Panama.14 The Corporation persevered, and asked the US government to withhold any further payment to Panama, until a settlement satisfactory for the bondholders was negotiated.15 The US reply was terse: given that the Corporation of Foreign Bondholders was not incorporated in the USA, it could not rely on the US government’s assistance in collecting on defaulted bonds held by another government.16 Under the Egyptian loan of 1872, the parties would appoint arbitrators in equal numbers, with the Ottoman Grand Vizir acting as umpire.17 Article XIX of the Mouharrem Decree (1880) provided: ‘All Disputes between the Governments and the Council as to the interpretation and execution of the Decree to be submitted to the decision of four Arbitrators, nominated by the two parties, and such Arbitrators to elect an Umpire in case of disagreement. The decision of the Arbitrator to be final, and without appeal.’18 Article 32 of the Greek law of financial control also foresaw arbitration in case of disagreements between the International Commission and the Greek government.19 The protocol between France and the UK of 20 November 1815, dealing with private

10 13 17 18 19

11 12 Ibid. Ibid., 91. Ibid., 92–94. 14 15 16 Ibid., 93. Ibid., 95. Ibid., 96. Ibid. W. Kaufmann, ‘Le Droit international et la dette publique e´gyptienne’, RDILC, 570. For the Ottoman Debt Dispute (1903) under this provision, see ch. 5.A above. For the arbitration under this provision arising out of the depreciation of the Greek drachma, see ch. 3.B.

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interests harmed in the course of the Napoleonic war, provided specifically for the settlement of debt claims in Article II.20 With respect to Colombia’s Consolidated External Debt of 1896, a dispute arose between the government and the Council of Foreign Bondholders. An arbitral tribunal decided that the bonds ought to be redeemed by drawings alone.21

B. Arbitration clauses 1900–1945 In the interwar period, enthusiasm for arbitration on sovereign debt was still running high. It lessened substantially after World War II. Current intergovernmental loan agreements almost never include arbitration clauses.22 In the interwar period, prominent examples include the financial reconstruction agreements under the auspices of the League of Nations. They often contained provisions for arbitration. Article XIII of the Austrian League reconstruction loan, for instance, submitted disputes to the League Council or a person appointed by it. The Dawes Loan and the Young Loan of 1930 also contained arbitration clauses.23 Often, sovereign lending instruments with an official character diverged from the standard pattern of dispute settlement in national courts. The Bulgarian stabilisation loan of 1928 foresaw the appointment of an arbitrator by the League’s Council. The clause provided: ‘Whenever any question arises as to the interpretation of the present text, such question shall be submitted to the Council of the League of Nations, and the decision by it, or by such person or persons as the Council may appoint to settle the question, shall be binding on all the parties concerned. When it is necessary to apply the present clause, the decision shall be taken by a majority vote.’24 By Protocol of 2 February 1914, France and Peru submitted the claim of Philon-Bernal and other bondholders of the Peruvian Loan of 1870 to arbitration.25 In Costa Rica, a 1905 agreement for the readjustment of external debt provided for PCA arbitration. 20

21 22 23

24

25

H. La Fontaine, Pasicrisie internationale 1794–1900: histoire documentaire des arbitrages internationaux (Berne: Staempfli, 1902), 103–13. CFB Rep (1927), 18. C. W. Jenks, The Prospects of International Adjudication (London: Stevens & Sons, 1964), 60. For the Dawes Loan Arbitration see ch. 7.C above; for the Young Loan Arbitration see ch. 4.D above. League Study Committee Report, II. Economic and Financial (1939), II.A. 10, 38–39; E. Borchard, State Insolvency and Foreign Bondholders: Vol.1, General Principles (New Haven: Yale University Press, 1951). Borchard, State Insolvency, 268.


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The Czechoslovak League of Nations loan also included the possibility of arbitration.26 Czech loans of 1932 and 1938 contained an arbitration clause in Article 22: ‘Any disputes which may arise as to the interpretation or execution of the present provisions shall be subject to the jurisdiction of the Permanent Court of International Justice at The Hague, acting in execution of Article 14 of the Covenant of the League of Nations. The Czecho-Slovak State undertakes to lay such disputes before the Permanent Court of International Justice, whose jurisdiction it accepts.’27 A 1922 loan from the United States to El Salvador provided that disputes between the lender and El Salvador would be referred to the Chief Justice of the United States for binding settlement. Secretary of State Hughes took note of this arrangement through an exchange of notes. The financial intermediary exaggerated the role of the State Department when offering the loan to the public. The prospectus claimed that the exchange of notes made any violation of bondholders’ rights a ‘direct breach of covenant and treaty’. This official support was crucial to build up demand for the loan. When the State Department discovered the misrepresentation, it was furious that it had been drawn into advertising a loan.28 The loan’s arbitration clause provided as follows: In case there shall at any time arise between the Republic, the Fiscal Agent and the Fiscal Representative, or any of them, any disagreement, question or difference of any nature whatever regarding the interpretation or performance of this contract such disagreement, question, or difference shall be referred to the Chief Justice of the Supreme Court of the United States, through the Secretary of the said United States of America, for determination, decision and settlement by such Chief Justice and the parties hereto severally agree that any determination, decision or settlement made by such Chief Justice shall be accepted by them as final and conclusive and that each of them will abide by such determination, decision, or settlement, and will fully perform and conform to the terms thereof. In case the said Chief Justice shall decline or be unable to act, then the Secretary of State of the United States of America shall be empowered to designate some other member of the federal judiciary of the United States of America to act in his place.29 26

27 28

29

J. Fischer Williams, ‘Le Droit international et les obligations financie`res internationales qui naissent d’un contrat’, Recueil des cours (1923), 293–361, 340. Ibid., 38–39. E. S. Rosenberg and N. L. Rosenberg, ‘From colonialism to professionalism: the public-private dynamic in United States foreign financial advising, 1898–1929’, Journal of American History 74 (1987), 59–82. R. W. Dunn and A. Richt, American Foreign Investments (New York: Viking, 1926), 227.

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A loan from the United States to Argentina in 1925 also contained a standard arbitration clause in Article V, para. 5: ‘Should the banker and/ or the paying agents have any doubts in some particular case as to their rights or obligations under the present Agreement, any question or difficulty of this kind shall be settled by reference to an arbitrator appointed jointly by the Ambassador of the Argentine Republic in the United States of America and the bankers; the decisions of this arbitrator shall be final and without appeal.’30 There are other examples.31 A loan by American bankers to Nicaragua included the following arbitration clause:32 ‘Any controversy between the concessionaires and the Republic, or between the Company and the Republic in relation with this contract or any affair connected with it, shall be decided by two arbitrators, and in case of disagreement, a third. One of the said arbitrators shall be appointed by the Republic, another by the Concessionaires or by the Company, whichever may be the case, and the third shall be appointed by the two first, or, in case they find it impossible to come to an agreement, by the Secretary of State of the United States.’

C. Arbitration clauses after 1945 Arbitration clauses in loan agreements are uncommon after 1945, even though ‘arbitration is by far the best method for settling [loan] disputes’.33 For official lending, arbitration clauses are sometimes included in loan agreements. Multilateral development banks such as the World Bank and the Inter-American Development Bank insert arbitration clauses into their lending agreements. However, multilateral lenders have never invoked such an arbitration clause. First, defaults on official debt, as a general rule, lead to restructuring negotiations, rather than formal dispute settlement. Second, multilateral development banks have other means to encourage debtor countries to pay, including the stick of diplomatic pressure and the carrot of withholding further lending on which the borrowing countries are often keen. 30 31

32

33

League Study Committee Report, II. Economic and Financial, 1939, II.A. 10, 38. E.g. Article XXII of the loan contract of 6 October 1922 between American bankers and Haiti, Dunn and Richt, Investments, 308. Article XVIII of an American bankers’ loan to Nicaragua, 1 September 1911, Dunn and Richt, Investments, 371. J. Salmon, Le roˆle des organisations internationales en matie`re de preˆts et d’emprunts: proble`mes juridiques (London: Stevens & Sons, 1958), 38.


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Arbitration clauses in private loan contracts and bonds were more common before the rise of restrictive sovereign immunity from the 1970s onwards. In lending agreements between commercial creditors and governmental borrowers, arbitration clauses are extremely rare nowadays. Dispute resolution in national courts is preferred. This preference is explained by the perceived risk of equity influencing arbitral awards, the signalling effect of public litigation in domestic courts and the potentially adverse effect of publicity on the borrower’s reputation, the availability of summary judgment and interim relief before domestic courts and the inertia of sovereign lending agreements.34 In the days of absolute immunity, an arbitration clause was the alternative to diplomatic pressure. Creditor countries actively encouraged a quasi-judicial avenue to avoid being pressured by bondholders, and debtor countries were keen to keep creditor governments at bay. As litigation in domestic courts is now an option, creditors as a general rule prefer this route of enforcement. It is seen as offering greater legal certainty than arbitration. The creditor’s performance is all up-front (the disbursement of credit), and the debtor country’s performance is all delayed (repayment). In such highly asymmetric transactions, lenders are keen to have a legal remedy that allows full enforcement of their claim. Arbitration is seen as running the risk of splitting the proverbial baby.35 World Bank loan agreements contain an elaborate ad hoc arbitration clause.36 Its General Conditions for Loans provide in part, (a)

(b)

34

35

36

Any controversy between the parties to the Loan Agreement or the parties to the Guarantee Agreement, and any claim by any such party against any other such party arising under the Loan Agreement or the Guarantee Agreement which has not been settled by agreement of the parties shall be submitted to arbitration by an arbitral tribunal as hereinafter provided (‘Arbitral Tribunal’). The parties to such arbitration shall be the Bank on the one side and the Loan Parties on the other side.

O. A. Ruiz del Rio, ‘Arbitration clauses in international loans’, J. Int’l Arb, 4 (1987), 45, 46; S. J. Choi and G. M. Gulati, ‘Innovation in boilerplate contracts’, Emory Law Journal 53 (2004), 929–96; W. M. C. Weidemaier, ‘Disputing boilerplate’, Temple Law Review, 82 (2009), 1–54. K. Halverson Cross, ‘Arbitration as a means of resolving sovereign debt disputes’, American Review of International Arbitration, 17 (2008), 366. Section 8.04, IBRD Conditions for Borrowers; M. C. Boeglin, The use of arbitration clauses in the field of banking and finance’, J Int’l Arb, 15 (1998), 19–24.

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sovereign defaults (c) The Arbitral Tribunal shall consist of three arbitrators appointed as follows: (i) one arbitrator shall be appointed by the Bank; (ii) a second arbitrator shall be appointed by the Loan Parties or, if they do not agree, by the Guarantor; and (iii) the third arbitrator (‘Umpire’) shall be appointed by agreement of the parties or, if they do not agree, by the President of the International Court of Justice or, failing appointment by said President, by the Secretary-General of the United Nations. If either side fails to appoint an arbitrator, such arbitrator shall be appointed by the Umpire . . . (j) The provisions for arbitration set forth in this Section shall be in lieu of any other procedure for the settlement of controversies between the parties to the Loan Agreement and Guarantee Agreement or of any claim by any such party against any other such party arising under such Legal Agreements. (k) If, within thirty days after counterparts of the award have been delivered to the parties, the award has not been complied with, any party may: (i) enter judgment upon, or institute a proceeding to enforce, the award in any court of competent jurisdiction against any other party; (ii) enforce such judgment by execution; or (iii) pursue any other appropriate remedy against such other party for the enforcement of the award and the provisions of the Loan Agreement or Guarantee Agreement. Notwithstanding the foregoing, this Section shall not authorize any entry of judgment or enforcement of the award against the Member Country except as such procedure may be available otherwise than by reason of the provisions of this Section.

Simpler World Bank grant agreements opt for UNCITRAL arbitration. No World Bank lending agreement has ever been adjudicated in arbitration. Arbitration clauses in lending agreements of the Asian Development Bank37 and the Inter-American Development Bank use similar formulations. The European Bank for Reconstruction and Development38 and the African Development Bank39 often include UNCITRAL arbitration clauses in their lending agreements. The Multilateral Investment Guarantee Agency (MIGA) provides for ICSID arbitration, with the PCA’s Secretary-General acting as appointing authority.40

37

38

39

40

Asian Development Bank, Ordinary Operations Loan Regulations, 1 July, 2001, Section 11.04. J. W. Head, ‘Evolution of the governing law for loan agreements of the World Bank and other multilateral development banks’, AJIL 90 (1996) 214–34, 218. General Conditions Applicable to the African Development Bank Loan Agreements and Guarantee Agreements, Section 10.04. Operational Regulations of the Multilateral Investment Guarantee Agency, Section 2.16.


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By contrast, few lending agreements with private creditors contain arbitration clauses. Georgia’s 2008 dollar bond provides for LCIA arbitration: ‘The Issuer irrevocably and unconditionally agrees that any disputes which may arise out of or in connection with the Notes (including any questions regarding their existence, validity or termination) may be referred to and finally resolved by arbitration under the Rules of the LCIA (formerly the London Court of International Arbitration). The place of such arbitration shall be London and the language English.’41 El Salvador’s $800 million loan of 2009 provides for UNCITRAL arbitration, with New York law as the exclusive applicable law: Any dispute, controversy or claim arising out of or relating to the Notes (other than any action arising out of or based on the United States federal or state securities laws), including the performance, interpretation, construction, breach, termination or invalidity thereof shall be finally settled by arbitration in accordance with the Arbitration Rules of the United Nations Commission on International Trade Law (excluding Article 26 thereof ) as in effect on the date of the Fiscal Agency Agreement (the ‘UNCITRAL Arbitration Rules’). The number of arbitrators shall be three, to be appointed in accordance with Section II of the UNCITRAL Arbitration Rules. The appointing authority shall be the Chairman of the International Court of Arbitration of the International Chamber of Commerce. The third arbitrator may be (but need not be) of the same nationality as any of the parties to the arbitration. The place of arbitration shall be New York, New York. The language to be used in the arbitration proceedings shall be English. Any arbitral tribunal constituted under this paragraph shall make its decisions entirely on the basis of the substantive law of the State of New York. The decision of any arbitral tribunal shall be final to the fullest extent permitted by law, and a court judgment may be entered thereon by any Salvadoran court lawfully entitled to enter such judgment. In any arbitration or related legal proceedings for the conversion of an arbitral award into a judgment, the Republic will not raise any defense that it could not raise but for the fact that it is a sovereign state.42

Qatar’s 2009 dollar bond also provides for UNCITRAL arbitration at the option of bondholders, alongside jurisdiction of New York courts: Any dispute, controversy or claim with or against the Issuer which arises out of or relates to the Bonds may, at the sole option of any Bondholder, be referred to and be finally resolved by arbitration in accordance with the Arbitration Rules of the United Nations Commission on International Trade Law set out in

41

42

Georgia, US$500,000,000 7.5% Notes due 2013; see also Republic of Estonia, EUR 100,000,000 5.00% Notes due 2007. Offering Circular, The Republic of El Salvador, US$800,000,000 7.375% Notes due 2019.

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Resolution 31/98 adopted by the General Assembly on 15 December 1976 as then in force (the ‘UNCITRAL Rules’). There shall be an arbitral tribunal composed of three arbitrators, one appointed by the relevant Bondholder in accordance with the UNCITRAL Rules and one nominated by the Issuer in accordance with the UNCITRAL Rules and the third, who shall chair the arbitral tribunal, appointed by the two party-appointed arbitrators in accordance with the UNCITRAL Rules. The presiding arbitrator shall be fluent in the English language and have substantial prior experience as an arbitrator of international commercial disputes. The appointing authority for the purposes of the UNCITRAL Rules shall be the International Chamber of Commerce Court of Arbitration. The place of arbitration shall be New York City. The English language shall be used throughout the arbitral proceedings. The award of the arbitral tribunal shall be final and binding on the parties and may be entered and enforced in any court having jurisdiction.43

Hungary’s 2009 euro bond also provides for UNCITRAL arbitration with the LCIA as the appointing authority: Without prejudice to the provisions of Condition 17 ( Jurisdiction) above, any Noteholder may, at its discretion, refer any Dispute to be settled by arbitration in accordance with the UNCITRAL Arbitration Rules as at present in force (the ‘UNCITRAL Rules’) . . . (b) Appointment of the arbitral tribunal: The arbitral tribunal shall be composed of three (3) arbitrators, one of whom shall be the presiding arbitrator. The appointing authority shall be the London Court of International Arbitration (the ‘LCIA’). The LCIA shall appoint all three (3) members of the arbitral tribunal and shall nominate which of them shall act as the presiding arbitrator. In all matters relating to the appointment of arbitrators, the Republic and each relevant Noteholder agrees that the LCIA shall be free to appoint whomsoever the LCIA considers appropriate in the LCIA’s sole discretion, save that the LCIA shall take account of the views of the parties and shall give effect to any agreement of the parties in relation to the appointment of the arbitrators unless the LCIA determines in the LCIA’s absolute discretion that it is not appropriate to do so.44

The Polish euro bond of 2002 also provides for LCIA arbitration: 17. (a) Arbitration: The Republic agrees that in relation to any claim by any Noteholder in respect of any dispute or difference of whatever nature howsoever arising under, out of or in connection with the Notes (including a dispute or difference as to the breach, existence or validity of the Notes) (each a ‘Dispute’), such Noteholder may elect, by notice in writing to the Republic to settle such claim by arbitration in accordance with the provisions of Condition 17(b). 43

44

Offering Circular, The State of Qatar, US$2,000,000,000 5.15% Bonds due 2014 and US$1,000,000,000 6.55% Bonds due 2019. Republic of Hungary, EUR 1,000,000,000 6.75% Notes due 2014.


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(b) London Court of International Arbitration Rules: The Republic hereby agrees that (regardless of the nature of the Dispute) any Dispute may be settled by arbitration in accordance with the London Court of International Arbitration Rules (the ‘Rules’) as at present in force by a panel of three arbitrators (or a sole arbitrator as the parties may agree) appointed in accordance with the Rules. The seat of any reference to arbitration shall be London, England. The procedural law of any reference to arbitration shall be English law. The language of any arbitral proceedings shall be English.45

Ukraine’s multi-currency amortising notes foresee LCIA arbitration on the following terms: all disputes under the notes are to be ‘resolved by arbitration instituted by the Trustee under the Rules of the London Court of Arbitration, which rules are deemed to be incorporated by reference herein. The place of such arbitration shall be London and the language English.’46 On the whole, however, the primary locus for dispute settlement on sovereign debt remains national courts. It remains to be seen whether the prospect of investment arbitration under BITs relating to sovereign defaults raises awareness of arbitration as an alternative to dispute settlement in national courts.47

D. Reasons for the lack of arbitration clauses after 1945 What explains this dearth of modern arbitration clauses? Bondholders reveal a preference for dispute settlement in domestic courts. The reasons are manifold. The inclusion of arbitration clauses is generally avoided, for fear of negatively affecting their marketability and the costs of government borrowing. Domestic courts are by and large the forum of choice. First, sovereign debt instruments are typically complex financial transactions governed by municipal law. Second, sovereign bonds with arbitration clauses, ICSID or otherwise, could implicitly recognise the possibility of default. A country that included an arbitration clause could be perceived as less committed to repay its debts. Third, sovereign bonds are the most ‘conservative’ financial instruments, whose contractual terms display tremendous inertia. Fourth, most creditors prefer dispute resolution in their own national courts, according to their country’s contract law. Creditor perceptions 45 46

The State Treasury of the Republic of Poland, Euro 750,000,000, 5.5% Notes due 2012. 47 Ukraine, Offer to Exchange, 9 February 2000. See chs. 10–13 below.

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are central. Should creditors perceive arbitration to be a less useful remedy, sovereign borrowers are unlikely to issue bonds with an arbitration clause. Financial market participants may also be wary of arbitrators’ tendencies to render equitable awards, and may prefer the greater predictability in national courts.48 Notwithstanding this, arbitration of sovereign debt instruments could enjoy a renaissance. For this reason a study of arbitral awards on sovereign debt instruments is valuable in view of distilling general principles in this case law. Future arbitral tribunals, whether operating under ICSID, UNCITRAL or another set of arbitration rules, will find these principles helpful in approaching claims on sovereign debt anew.

48

W. W. Park, Arbitration of International Business Disputes: Studies in Law and Practice (Oxford University Press, 2006), 560; Boeglin, ‘Use of arbitration clauses’, 19–24.

9

Creditor protection in international law

Before World War I, creditors (or their governments) generally failed to obtain compensation before arbitral tribunals and mixed claims commissions.1 Except in limited circumstances, claims commissions tended to decline ‘pure’ creditor claims. Some tribunals declined compensation to creditors because no clear link of causation ran from a governmental expropriation of some commercial undertaking to injury suffered by the creditor. The creditor suffered only indirect injury.2 This reluctance to accept creditor claims extended to national courts and claims commissions.3 A first shift occurred in the interwar period, though consistency in the claims practice on creditor claims remained lacking.4 For one, secured debt claims – such as mortgages – started to receive international protection.5 Mortgages are rights in rem, and closely related to immovable property. In isolated cases, unsecured claims were deemed to benefit from protection under international law too.6 Most of the time, however, unsecured creditors, or, more precisely, their state of nationality in the days of diplomatic protection, lacked an international law remedy. 1 3

4 5

6

2 Ralston, Law and Procedure, 158. Mora & Arango (US v Spain); Alsop (US v Peru). Blagge v Balch (1896) (French Spoliation Act excludes creditors and assignees); Labadie v United States (1891 Indian Depredation Act excludes creditors and assignees). D. Bederman, ‘Creditors’ claims in international law’, International Lawyer, 34 (2000), 238. Ibid., 237; A. Feller, The Mexican Claims Commissions, 1923–1934 (New York: Macmillan, 1935), 116–17; Hedges v Cuba (only mortgage bond secured on Cuban property capable of being taken by Cuban government, other bonds denied); Marcus v Cuba (dollar bonds secured by mortgage upon the real property of Cuban Railroad Company); Killkalee v Cuba (gold bonds issued by private association secured on Cuban property). Compagnie Geńe´rale des Eaux de Caracas (Belgium v Venezuela) (Venezuela liable for debts of expropriated entity); Deere v Cuba (failure to pay promissory note when due, without express repudiation, constitutes taking).

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Creditor claims raise particular issues of causation and attribution under the secondary rules on state responsibility. In the international law on creditor claims the question of the immediacy of damages looms large. A general rule that any ripple effect of some injury to tangible property on the creditor’s contractual rights is compensable has long been regarded as problematic. The tendency was to look at the connection of the creditor’s loss with the direct injuries to person or property. If this link was too remote, the creditor had no claim in international law against the government. In the Ziat, Ben Kiran Arbitration, arbitrator Max Huber categorically rejected the contention that international law protection extended to the person ‘who is only a creditor of another upon whom the damage has directly fallen in immediate form’.7 Only a person ‘who has been immediately hit by the damage’ could claim relief. Another good example of the operation of the directness criterion is the Dickson Car Wheel Company case. The Mexican–American General Claims Commission examined the non-payment of a debt arising out of a sale of goods to a Mexican enterprise nationalised soon thereafter. The Commission held that the claimant lacked standing to sue because only a Mexican company suffered the injury, rather than the American creditor.8 The company continued to exist, and the creditor had a legal remedy in respect of the payment due under the contract. The Commission went further, holding that a ‘State does not incur international responsibility from the fact that an individual or company of the nationality of another State suffers a pecuniary injury as the corollary or result of an injury which the defendant State has inflicted upon an individual or company irrespective of nationality when the relations between the former and the latter are of a contractual nature’.9 Commissioner Nielsen dissented on the grounds that the creditor had in fact suffered direct damage due to Mexican governmental acts: if ‘the Mexican government had taken over the [railway] lines because it wanted to prevent the fulfillment of this or other contracts, it would be easier to say that the damage was “direct” and hold Mexico responsible’.10 In Oil Field of Texas v Islamic Republic of Iran, the Iran–US

7 8

Ziat, Ben Kiran Arbitration, quoted from Bederman, ‘Creditors’ claims’, 239. 9 10 Dickson Car Wheel Company Case. Ibid., 681. Feller, Mexican Claims, 124.

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Claims Tribunal attributed the denial of the claim in the Dickson case at least partly to the fact that the remaining assets and income of Dickson’s contractual counterparty could be used to satisfy creditor claims.11 Other awards in that period adopted the same restrictive directness criterion.12 In Hoffmann and Steinhardt, a case concerning bonds issued by a private railway before the American–Turkish Claims Commission, the Commission required ‘convincing evidence showing interference by the Turkish government with property rights, resulting, in effect, in confiscation’.13 The Commission also set out general requirements for successful creditor claims under international law: (1) that the claimant has cognizable property interests in another entity, which can include contractual rights or debt obligations; (2) that the government ‘exercised control’ over the entity ‘and interfered with its operation and took action resulting in the destruction of the claimant’s property rights in a manner violative of international law’; and (3) ‘the claimant has suffered damages that can be estimated with reasonable accuracy’.14

Under these conditions, the Commission concluded, the presumption that ‘damages sustained were the proximate result of the application of such measures’ was warranted.15 These conditions, taken together, amount to a general rule that creditor claims are compensable provided government action confiscated an entity along with its contractual and debt obligations.16 The causation of the injury is the critical element. But the cases provide little further guidance on how causation with respect to creditor claims ought to be assessed.

A. Creditor claims before mixed claims commissions After widespread takings of private property in revolutions, social strife and armed conflicts, states established a number of mixed claims commissions in the second half of the nineteenth century. A particularly active commission was the German–US Mixed Claims Commission established after World War I which adjudicated more than 20,000 11 12

13 14

Oil Field of Texas v Iran, 347, 375, n. 14; Feller, Mexican Claims, 182. Cre´dit Foncier Mexicain v Mexico; San Marcos & Pinos v Mexico (UK v Mexico) (claim based on debentures secured by mortgage denied). Hofmann and Steinhardt v Turkey (US v Turkey), 291. 15 16 Ibid., 293. Ibid. Bederman, ‘Creditors’ claims’, 241.

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cases arising out of World War I between 1922 and 193917 and adjudicated several claims arising out of sovereign debt.

Mixed claims commissions generally Mixed claims commissions are ad hoc bodies created by international agreement with the purpose of settling claims between a private party and a state, typically mediated by the diplomatic presentation of the state of nationality. They are the forerunners of mixed arbitral tribunals, though the boundary between the two is fluid. As a general trend, the influence of governments is greater in mixed claims commissions. Their heyday was the interwar period, when they dealt with thousands of cases.18 They stand at the intersection of diplomatic and judicial methods of dispute settlement. By contrast, national claims commissions are organs established by one state, though on the basis of an international agreement.19 Mixed claims commissions decide disputes based on their constitutive instrument. Bases for jurisdiction and compensation differ. Typically, these commissions enjoy jurisdiction over pecuniary claims. The applicable law varies considerably from one commission to the next. In most cases, international law figures as part of the applicable law, sometimes alongside equity and fairness.20 Hersch Lauterpacht defined mixed claims commissions as follows: ‘bodies composed exclusively or predominantly of the nationals of the disputant States, and combining, through the instrumentality of an appropriate procedure, the functions of negotiators, advocates and judges’.21 In case of a tie between the commissioners appointed by the states, an umpire, typically a third-party national, cast the decisive vote. Their composition also varied. Until 1875, most mixed commissions consisted only of two commissioners, one from each appointing state. That commissioners often acted like advocates for the appointing party rather 17

18

19 20 21

A. Burchard, ‘The Mixed Claims Commission and German property in the United States of America’, AJIL, 21 (1927), 472–80; Mixed Claims Commission, United States of America and Germany: Administrative Decisions and Opinions of a General Nature and Opinions and Decisions in Certain Individual Claims (Washington, DC: Government Printing Office, 1925–1933), vols. 1–2. H. Van Houtte et al., Post-War Restoration of Property Rights under International Law (Cambridge University Press, 2008), 45–46. R. Dolzer, ‘Mixed claims commissions’, in MPEPIL (2006), para. 4; see section D below. Dolzer, ‘Mixed claims commissions’, para. 15. H. Lauterpacht, The Function of Law in the International Community (Oxford: Clarendon Press, 1933), 220–22.


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than as independent adjudicators was their biggest shortcoming.22 The presence of a neutral member, who could not be a national of any contracting party, enhanced the independence of the commissions and moved towards the arbitral settlement of such disputes.23 The case law of these mixed claims commissions wavers between affirming and declining jurisdiction over sovereign debt. This hesitation to hear claims arising out of defaulted sovereign debt pointedly underscores the political and economic tensions underlying such adjudication. Notwithstanding this, these awards contain varied approaches to dealing with defaulted sovereign debt.

Jurisdiction over sovereign debt The awards on sovereign bonds by mixed commissions came against the backdrop of an increasing willingness by creditor countries to extend diplomatic protection to ‘hazardous loan contracts’.24 In the early stages of international sovereign debt adjudication, the divorce of international law from politics was incomplete at best. Such disputes invariably carried important political overtones. Du Pont v Mexico is a good example of a mixed commission exercising arbitral restraint over sovereign debentures held by US citizens.25 The umpire did not intervene, as the US and the Mexican Commissioners both declined jurisdiction. By way of historical background, the following events are instructive. In 1851, Mexico and France signed an acknowledgment of public debt owed to two Swiss banks secured by custom receipts. The counterń subsequently took out a revolutionary government of General Miramo 1 million peso loan, secured by over 15 million peso bonds. Upon capturing Mexico City, Juare´z refused to honour these bonds. When Mexico suspended payments for a two-year period thereafter, France, Britain and Spain broke off diplomatic relations with Mexico.26 A joint military intervention followed, and in 1864 France installed 22

23 24

25 26

G. Watrin, Essai de construction d’un contentieux international des dettes publiques (Paris: Sirey, 1929), 244. Dolzer, ‘Mixed claims commissions’, para. 14. Venezuelan Bond Cases, Claims Commission, Convention between the United States and Venezuela of 5 December 1885, Moore, Arbitrations, vol. 4, 3616, seemingly inspired by Palmerston’s memorandum. Du Pont v Mexico (US v Mexico). 51 BFSP, 63; A. H. Feller, The Mexican Claims Commissions, 1923–1934: A Study in the Law and Procedure of International Tribunals (New York: Macmillan, 1935), 7ff.

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Maximilian as emperor. Thereafter, Mexico agreed to a number of claims conventions which provided potential consent to the adjudication of sovereign debt claims.27 Mexico indemnified foreign nationals for non-payment of 5 million peso bonds. In Du Pont v Mexico, US commissioner Wadsworth found that ‘neither government has with sufficient clearness agreed to refer [sovereign bonds] to this commission’.28 Mexican commissioner Zamacona also declined jurisdiction with reference to ‘general propriety and justice’.29 He affirmed that the ‘disturbance which would ensue in the administration, credit, and relation of modern nations, if claims on the account of the public debt, such as those involved in this case, were made the matter of international claims, has long been understood’.30 Commissioner Zamacona then highlighted the risk of litigation arbitrage, whereby non-US holders of Mexican bonds would sell their claims to US citizens solely for collection purposes. Mexico submitted that Nemours originally acquired only $33,000 ($58 million, $0.5 million) in bonds, whilst Nemours now presented bonds worth $47,000 ($82 million, $0.6 million) for payment, and likely acquired the Mexican bonds from non-US holders. Zamacona underscored the resulting risk that the ‘whole of the debt of [Mexico] would be covered by the flag of the [United States], whose citizens would appear as monopolizing Mexican bonds’.31 The Riggs, Oliver, Fisher mixed commission also declined jurisdiction in a claim for payment of principal and interest on overdue New Grenadian bonds.32 The claim was first brought before the mixed commission established by the treaty between the United States and New Grenada of 10 September 1857. That commission left the matter undecided. Bondholders pressed these claims a second time before another commission established by the treaty between Colombia and the United States of 1864. The scope of arbitration in both conventions was identical. At the outset, the commission addressed whether this class of debts fell within the scope of claims to be settled. Umpire Bruce held that Colombian bonds were not covered by the term ‘all claims’ which the 1864 Convention desired to settle. The commission reserved the term for those claims states generally accept for diplomatic protection. It confined the term ‘all claims’ to ‘demands which must have been made

27

28 32

The Convention of 10 April 1864 between France and Mexico, 54 BFSP 944; Doyle Convention (Mexico and Great Britain), 4 December 1951. 29 30 31 Du Pont v Mexico (US v Mexico), 3617. Ibid., 3616. Ibid. Ibid. Riggs, Oliver, Fisher (USA v Colombia).


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the subject of international controversy, or which are of such a nature as, according to received international principles, would entitle them on presentation to the official support of the government of the complainant’.33 Examining the policy of the United States and Great Britain, the Commission found that both governments had: not laid down or acted upon the principle that a citizen, who holds an interest in the public debt of a foreign country . . . is entitled as a right of the same support in recovering it as he would be in a case where he has suffered from a direct act of injustice or violence. This commission can not assume upon the strength of a general term, and in the absence of express language to that effect, that the Government of the United States has intended to delegate to it powers which it has not exercised itself in a matter of so much delicacy.34

The US Secretary of State Chase supported this position with an amicus curiae letter, which stated that the US ‘government had not been in the habit of enforcing such claims against foreign governments’.35 The mixed commission assimilated diplomatic protection and presentation of a claim before mixed commissions. The power to adjudicate ‘all claims’ implies that the tribunal also has jurisdiction over contract claims. The specific treaty language matters. As the commission explained: Before entering upon this examination the Commission feels bound to state that any representation of international jurisprudence, and especially of the jurisprudence of the Mexican Claims Commission of 1868, intended to proclaim in a general way that such jurisprudence was either in favor of jurisdiction over contract claims or disclaimed jurisdiction over contract claims, is contrary to the wording of the awards themselves . . . A rule that contract claims are cognizable only in case denial of justice or any other form of governmental responsibility is involved is not in them; nor can a general rule be discovered according to which mere non-performance of a contractual obligation by a government in its civil capacity withholds jurisdiction, whereas it grants jurisdiction when the non-performance is accompanied by some feature of the public capacity of the government as an authority . . . The Treaty is this Commission’s charter. It must look primarily to the language of that Treaty . . . to discover the scope and limits of its jurisdiction.36

In Illinois Central Railroads, the commission interpreted the term ‘all claims’ as referring to all claims of an international character for which 33 36

34 35 Moore, Arbitrations, vol. 4, 3614–15. Ibid., 3615. Ibid. Feller, Mexican Claims, 175; Illinois Central Railroad v United Mexican States (US v Mexico), Opinions of Commissioners, 1927, 16.

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either government is responsible under international law, including contractual claims.37 However, the commission failed to state clearly that it was not applying international law to a claim governed by Mexican law.38 In Howard v Mexico, the British–Mexican Commission affirmed jurisdiction over a contractual claim for the payment of rent, ostensibly because the landlord had been forced into the rental agreement by revolutionary leaders. It left open the question of whether it had jurisdiction over contractual claims generally.39 Official diplomatic support by the home government, the US–Colombian mixed commission reasoned, was a requirement for bondholders to ´ knew of the enjoy standing. Even though the US delegation in Bogota instant case and referred it to the commission for consideration, Umpire Bruce found no evidence that the country of nationality had formally decided to press for satisfaction. The acts of US officials were of ‘private or at most of an officious character’ and did not ‘transcend the limits of that friendly countenance which the ministers of foreign powers always give to the holders of shares in public debt’.40 The commission then obliquely referred to ‘many reasons of policy’ which would ‘deter a government from insisting on preferential payment of a part only of the public creditors of a foreign state’. The umpire declined jurisdiction, after insisting that for reasons of sovereign lending policy the presumption of jurisdiction could not be in favour of creditors who chose not to participate in a sovereign debt restructuring. The umpire reasoned that, since the powers of the commission were of an ‘exceptional and circumscribed character’: in all cases in which reasonable doubt exists as to its competence, and especially in those now under consideration, which interest directly the credit and the good faith of one of the contracting parties, the commission is bound to consider its powers in a limited and not in an extensive sense.41

The Aspinwall tribunal, in a clear departure from Riggs and Du Pont, affirmed jurisdiction when bondholders sought recovery on defaulted Venezuelan bonds before the US–Venezuelan Claims Commission.42 An earlier mixed commission under the Convention of 25 April 1866 had 37 38

39 41

Feller, 176. Cf. Serbian Loans Case, where the PCIJ applied Serbian law to the bonds, rather than international law. 40 Howard v Mexico (UK v Mexico). Riggs, Oliver, Fisher, 3616. 42 Ibid. Cf. The Wimbledon. Aspinwall (US v Venezuela).


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dismissed the same claim. The claim was re-opened because of alleged fraud by the arbitrators.43 The US commissioner, along with the US minister in Caracas, extracted about half of the creditor’s claim in ‘honorary attorney fees’.44 Another tribunal was set up under the Convention of 5 December 1885. A 2:1 majority of the Aspinwall commission held that the protocol’s term ‘all claims’, by its plain language, encompassed sovereign bond claims. The commission distinguished this language from the US–Mexican protocol covering ‘all claims . . . arising from injuries to persons or property’. That qualifier could present an obstacle to jurisdiction over sovereign bonds. The US argued persuasively, based on minute analysis of municipal and international case law, that the US–Venezuelan protocol’s language of ‘all claims . . . arising out of injuries to . . . person or property’ covered breaches of contract.45 However, in the Flannagan case, a 2:1 majority of the same commission declined jurisdiction, based in large part on a Calvo Clause incorporated in the bond.46 The Ecuadorian Claims Commission adopted a broad reading of ‘all claims’.47 In 1897, Ecuador entered into a contract for the construction of a railway line from Guayaquil to Quito. Two companies were incorporated to that effect, and the government guaranteed repayment of their bonds using customs revenues. All disputes between the contracting parties were to be decided through arbitration by the US and Ecuadorian Presidents. They could also appoint substitutes, and in case these two substitutes failed to agree, they could appoint an umpire.48 When Ecuador attempted to take over the running of the railway, the US government invoked this arbitration clause.49 Commissioner Little, after extensive textual analysis of the meaning of ‘all claims’, strongly criticised Du Pont and Riggs. In his view, the tribunal established a presumption against jurisdiction, according to which ‘jurisdiction must be denied in all cases unless its existence is

43

44 45

46

47 49

E. Borchard, State Insolvency and Foreign Bondholders: Vol.1, General Principles (Yale University Press, 1951), 267. Watrin, Essai de construction, 270–71. Quoted from E. Borchard, ‘Contractual claims in international law’, Col. LR, 13 (1913), 457–99, 472, n. 42. See the discussion of the Calvo Clause, including Flannagan v Venezuela (US v Venezuela), at ch. 11C below. 48 Ralston, Law and Procedure, 77. CFB Rep (1908), 116. CFB Rep (1908), 170.

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manifest beyond a reasonable doubt’.50 Under this presumption, the umpire risks abdicating his function as adjudicator with a duty to decide the dispute at hand. To Commissioner Little, the commission in Riggs and Du Pont inserted a requirement of diplomatic protection contrary to the plain language of ‘all claims’. This amounted to a material change of the Convention, contrary to the intention of the state parties: ‘Where, in words, “all claims” are submitted, there can not be said to be an “absence of express language” of submission, nor room for assumption in that regard.’51 From settled state practice of not presenting bond claims diplomatically it could not be inferred that the US government was not free to provide another mode of adjudication to which individual claimants enjoyed direct access.52 Commissioner Little’s view that the presentation of claims before mixed commissions and diplomatic protection are two separate routes of enforcement represents the modern view that breathes life into the international settlement of disputes. States lose functional control in each case over whether claims may be brought. They only establish broad parameters for adjudication through their consent to jurisdiction. In Commissioner Little’s view, jurisdiction could not hinge on whether diplomatic protection was in fact exercised, but only on whether the governments could use diplomatic protection on sovereign bonds. This was clearly the case here. He buttressed his argument by reference to several sovereign bond cases decided favourably by the British–Venezuelan mixed commission of 1868. Finally, jurisdiction could not, in Little’s view, turn on alien reasons of policy. The commission’s jurisdiction, as established in the protocol as a matter of law, is independent of governments’ shifting policies on sovereign debt. Commissioner Findlay concurred with Commissioner Little. After highlighting that universal sovereign immunity was ‘essential to the common defense and general welfare, as without its protection governments would be disabled from performing the various duties from which it was created’, found that, without limitation, all claims were within the purview of the commission.53 In his view, to import ‘the policy of the United States into the treaty for the purpose of modifying express terms too general in their character’ would defeat the object of the Convention.54 50 52

51 Moore, Arbitrations, vol. 4, 3617ff. Ibid., 3627. 53 54 Ibid., 3628. Ibid., 3643. Ibid., 3647.


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He explained that there was no obstacle to the commission’s jurisdiction over contract claims. Commissioner Findlay explained that a ‘claim is none the less a claim because it originates in contract instead of in tort. The refusal to pay an honest claim is no less a wrong because it happens to arise from an obligation to pay money instead of originating in violence offered to persons or property.’55 Nevertheless, Commissioner Findlay took note that in conformity with state practice, the United States generally did not exercise diplomatic protection on the ground that a sovereign bond is ‘a voluntary engagement which the respective parties had better settle among themselves. This principle is applied to claims of this kind of every character, big or little, concerning public debt or otherwise.’56 Still, the commission was bound to consider suits which clearly fell within the express language of a submission. Drawing a clear distinction between diplomatic protection and arbitration, Commissioner Findlay saw ‘no reason why such a policy should not be departed from when arbitration is adopted as the method of finally adjudicating international claims’.57 As a result, only express exclusions could limit the plain language of consent to arbitration.58 The Venezuelan commissions of 1903 dealt with four sovereign bond cases. Compagnie Geńe´rale des Eaux de Caracas concerned bearer bonds issued by Venezuela to the Compagnie Geńe´rale des Eaux for public works. The commission had jurisdiction to examine ‘all Belgian claims’. The direct link between bonds issued as payment for property transferred and services rendered to the government overcame the presumption of no jurisdiction.59 Commissioner Grisanti opposed jurisdiction since, first, the claimant did not adduce the bonds before the commission and, second, continuous ownership by an eligible national for the entire lifetime of the bond was impossible to determine. In Boccardo, the claimant had received bonds in exchange for merchandise furnished.60 The commission affirmed jurisdiction with explicit reference to Aspinwall. It required proof that the bonds had been delivered to the Italian claimant at issuance and never left his possession. 55

56 59 60

Venezuelan Bond Cases, Moore, Arbitrations, 3649. See also Rudloff Case (Interlocutory), 248–50; Rudloff Case (Merits), 259; Oliva Case, 609. 57 58 Moore, Arbitrations, 3650. Ibid., 3649. Ibid., 3651. Compagnie Geńe´rale des Eaux de Caracas (Belgium v Venezuela). Boccardo (Italy v Venezuela).

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The Ballistini Tribunal declined liability on sovereign bonds on two grounds. First, the tribunal dismissed the claim because the claimant failed to prove ownership, and second, because of the speculative character of the bond purchase.61 Compagnie Geńe´rale des Eaux de Caracas and Boccardo hint at two types of sovereign bond claims: on the one hand, sovereign bonds issued for public works or services rendered to the government; on the other hand, free-standing sovereign bonds issued for general budgetary purposes of the issuing country. Ballistini and Jarvis foreshadow how benefits to the issuing country as a result of the acquisition of sovereign bonds are taken into account for jurisdiction and liability. In Jarvis, the commission declined jurisdiction on the grounds that the creditor received the bonds in question in exchange for services to a temporary dictator in an unsuccessful revolution.62 With reference to the US Constitution, the commission affirmed that treaties were part of the law of the land, including the peace agreement between Venezuela and the United States of 1836. The bond itself stated that money had been rendered to General Paez in 1849 to overthrow the existing Venezuelan government.63 The claimant had to come before the commission with clean hands. In the cases Parrot and Zander, by contrast, the insurrection succeeded and the objection that the money was lent at the time to an insurrectional movement failed.64 These two decisions are in line with the modern rule reflected in Article X of the ILC Articles on State Responsibility, according to which conduct of the revolutionary movement is attributed to the state only if the insurrection succeeds.

Summary The case law of the Mexican–, Colombian– and Venezuelan–US mixed commissions on sovereign debt oscillates between two polar extremes.

61 62

63 64

Ballistini (France v Venezuela). Jarvis (US v Venezuela), Watrin, Essai de construction,196–99; cf. also Cucullu v Mexico, Moore, Arbitrations, vol. 4, 3479–3482, 3482 (the Zuloaga Government was not an authority of the Mexican government; lending to an insurrectional movement while the United States was at peace with Mexico was an immoral loan); Stuckle v Mexico, Moore, vol. 3, 2935, Convention of 1868 of Washington (monies lent to Emperor Maximilian); Barret, Moore, vol. 3, 2901 (no responsibility for debts of insurgents). Ralston, Law and Procedure, 148; Watrin, Essai de construction, 198. Parrot, Zander, Moore, Arbitrations, vol. 4, 3422, 3429.


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The resulting inconsistency is perhaps why some writers regard mixed commissions as an outright failure.65 The ghost of the Palmerston doctrine is alive and well in the cases before mixed commissions. Mixed commissions are reluctant to grant claims of individual creditors. Sometimes creditors are said to lack locus standi. On the one hand, the denials of jurisdiction in Du Pont and Riggs are difficult to reconcile with the plain language of the protocol.66 Even though the protocols provided for the settlement of ‘all claims’ the umpire held that bonds did not amount to ‘claims’. Riggs held that when ‘reasonable doubt exists as to its competence . . . [in cases] which interest directly the credit and the good faith of one of the contracting parties, the Commission is bound to consider its powers in a limited and not in an extensive sense’.67 The commissions ascribe primary importance to policy, and display great reluctance to exercise jurisdiction in ‘matter[s] of so much delicacy’68 without unambiguous consent. Where sovereign creditworthiness is at stake, tightly circumscribed jurisdiction is presumed, even when at odds with the consent to arbitration. In many mixed commission cases, the proximate cause for declining jurisdiction is the absence of diplomatic protection. Commissions thereby failed to properly differentiate between diplomatic protection and the separate question of whether the commission had jurisdiction to decide debt cases under the language of the protocol. It is likely that this conflation expresses a reluctance to exercise jurisdiction without express consent in the protocol over claims arising out of public debt. These tribunals were mindful of the political and financial effects of their awards. The Aspinwall Case, on the other hand, operates with the opposite presumption.69 Unless expressly excluded by virtue of the plain language of the protocol, claims of every character are submitted for arbitration. Mixed commissions are correctly regarded as a mode of adjudication distinct from diplomatic protection. State practice on diplomatic protection on sovereign bonds has no bearing on their jurisdiction. 65

66 67 69

R. Lillich and B. Weston, International Claims: Their Settlement by Lump Sum Agreements (University Press of Virginia, 1975), 31 (mixed commissions display ‘inherent defects and repeated failures’); R. B. Lillich, The Protection of Foreign Investment: Six Procedural Studies (Syracuse University Press, 1965), 10. Du Pont v Mexico (US v Mexico); Riggs, Oliver, Fisher (US v Colombia). 68 Moore, Arbitrations, vol. 4, 3614. Ibid., 3615. Aspinwall (US v Venezuela).

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The great weight of authorities at the time was to the effect that international responsibility does not arise from a breach of contract, unless there has been a denial of justice.70 The exception may be confiscatory breaches of contract where no legal redress exists, and a denial of justice is immediately apparent because there has been no resort to a procedure guided by law.71 In paying little regard to the policy repercussions and general international law in affirming jurisdiction and liability on sovereign bonds, however, some commissions fail to recognise that decisions relying solely on narrow and highly case-specific protocols are bound to be short-lived. Tribunals ought to incorporate general international law into their decisions, taking due account of the special character of sovereign debtors. In the long run, only such balanced adjudication stands a chance of general acceptance.

B. Creditor claims before the ECHR The European Convention adopted a wide definition of ‘property’, considerably larger than the typical notion of property in private law.72 The European Court of Human Rights has refrained from offering any definition of the term.73 Creditor claims may be ‘possessions’ under Article 1, First Additional Protocol ECHR. Article 1 provides: Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and the general principles of international law. The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions and penalties.

The notion of possessions According to the ECHR’s constant jurisprudence, there are two broad categories of ‘possessions’. First, existing property rights and, second, 70 71

72

73

Feller, Mexican Claims, 174. Borchard, Diplomatic Protection, 292; F. Dunn, The Protection of Nationals: A Study in the Application of International Law ( Johns Hopkins Press, 1932), 167; Feller, Mexican Claims, 175. Handyside v UK (the terms ‘possessions’, ‘property’, ‘biens’, ‘proprie´te´’ are identical); U. Kriebaum, Eigentumsschutz im Vo¨lkerrecht (Berlin: Duncker & Humblot, 2008), 44, 47. U. Kriebaum and A. Reinisch, ‘Property, Right to, International Protection’, in MPEPIL, 10.


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existing claims to money or performance with a financial value, provided that the holder may legitimately expect their fulfilment.74 The court has also qualified court judgments with no possibility of further appeal as ‘possessions’.75 It is important to note that the wide definition of possessions under Article 1 of Protocol No. 1 ECHR is not necessarily co-extensive with the protection of property under general international law, outside the regional European context. As far as general public international law is concerned, the question whether a contractual claim to payment is protected property in international law is in flux. In many ways, the term ‘investment’ is synonymous with the notion of property in international law.76 Only limited authority lends support to the view that creditor claims are protected property as a matter of international law generally. Of particular interest in this respect is the definition of investment in international investment law and whether contractual rights are susceptible of being expropriated. Douglas emphasises the proprietary character of the assets that qualify as covered investments: ‘simple contractual rights do not qualify as investment’.77 The answer is more nuanced than is generally acknowledged, despite the broad asset-backed definition of modern investment treaties.

Sovereign debt claims In de Dreux-Bre´ze´ v France, a large French holder of defaulted Tsarist debt applied unsucessfully to the ECHR.78 Between 1822 and 1914, almost 2 million French nationals bought Tsarist debt and lent Russia over 12 billion gold francs. France received several token payments in satisfaction of these debts over the decades. In 1990, the two governments 74 75

76

77

78

Kriebaum, Eigentumsschutz, 124. Brumarescu v Romania; O.N. v Bulgaria (judgment on a claim for restitution); Sciortino v Italy (non-enforcement of a national court decision to award the claimant a higher state pension); Burdov v Russia, paras. 39, 40 (tort claim against State which became binding). B. Legum and C. Mouawad, ‘The meaning of “investment” in the ICSID Convention’, in P. Bekker, R. Dolzer and M. Waibel (eds.), Making Transnational Law Work in the Global Economy: Essays in Honour of Detlev Vagts (Cambridge University Press, 2010), 326–56. Z. Douglas, The International Law of Investment Claims (Cambridge University Press, 2009), Rule 22, 161, and also paras. 343, 353, 359, 385; S. Schill, The Multilateralization of International Investment Law (Cambridge University Press, 2009), 72. De Dreux-Bre´ze´ v France. De Dreux-Bre´ze´ held 7967 bonds for more than 4 million gold francs and 137,000 gold roubles; critical of the court’s reasoning is S. Touze´, ‘L’Affaire des emprunts russes devant la cour europeénne des droits de l’homme’, Revue trimestrielle des droits de l’homme, 57 (2004), 275–316.

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agreed to resolve their outstanding financial disputes with the shortest possible delay. However, the Soviet Union never ratified the treaty. Negotiations restarted in 1992, and led to an agreement that was never applied. Finally, in November 1996, the two governments concluded a memorandum providing for a final and global settlement of all outstanding financial obligations prior to 1945, for a global sum of $400 million. France was responsible for distributing the sums to holders, and to establish a procedure and eligibility criteria. De Dreux-Bre´ze´ complained that the $400 million amounted to less than 1 per cent of what Russia owed French bondholders. The French govern´tat to ment created a monitoring committee attached to the Conseil d’E supervise payments to entitled holders.79 Within six months, the committee was to draw up a list of eligible holders.80 More than 9 million bonds were deposited for compensation by more than 300,000 individuals. When the Association Française des Porteurs d’Emprunts Russes (AFPER) requested the Russian Federation to pay 9 billion gold francs in 1999, the Federation relied on the global and definitive settlement of any outstanding obligation. Russia maintained that for a French court to have notified Russia of this dispute breached France’s international obligations. AFPER attempted to seize Russian state property in France. Even though the judge agreed that the applicants presented valid claims, he denied attachment on grounds of sovereign immunity.81 Another group of French holders of Russian bonds brought a claim before the administrative tribunal of Paris,82 seeking compensation from France for failure to negotiate appropriate compensation with the Soviet Union and its successors. The tribunal declined to entertain the action, noting that it related to the conduct of foreign policy and was hence not of the character suitable for adjudication. The tribunal also noted the abnormal and special risks that go hand in hand with financial transactions with foreign states. De Dreux-Bre´ze´ alleged violations of Article 1, First Additional Protocol and Article 14 ECHR. He maintained that bondholders received only 79 80 81 82

Decret no. 97–134, 12 February 1997. Article 73, Loi no. 98–546, 2 July 1998, and Decret no. 98–552. AFPER v Russian Federation (1999). GNDPTR v France (1993); GNDPTR v France, (challenge to decree laying down modalities for ´tat: Jean Claude U. v France; M. Romain X. v compensation dismissed); cf. also Conseil d’E France (holders retain rights against Russia); Andre´ v France; Ge´rard A. v France.


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minuscule compensation, and hence bore a special burden. The ECHR first noted the special and unique circumstances of the applicant – a situation which would normally fall outside the court’s jurisdiction ratione personae and ratione temporis. It explained that the 1996 agreement had given rise to a ‘possession’, and pointed out that the applicant did not allege expropriation. It went on to examine whether a just equilibrium had been maintained between safeguarding fundamental human rights and the public interest. The court affirmed that Article 1, First Additional Protocol did not guarantee a general right to full compensation in all circumstances. Public interest considerations could warrant compensation below fair market value,83 though only in exceptional circumstances was no compensation at all warranted.84 The court recalled that France had for decades negotiated with Russia, and that no greater compensation would have been forthcoming in the absence of the Franco-Russian agreement. It must have been clear to the applicant that eighty years after default the chances of recovery were minimal. Moreover, the court pointed out that the applicant had engaged in a speculative financial operation, with potential profits but also attendant risks. The French government had the discretion to distribute compensation payments in such a way as to minimise injustice to bondholders as a group, even if that meant paying symbolic compensation without regard to the size of each holder’s portfolio.85 As a result, the court declared the application inadmissible. A series of earlier applications by French holders of defaulted Tsarist debt had raised similar issues. All failed.86 In Malysh v Russia, six Russian applicants maintained that the failure of the Russian government to provide for payment on Urozhay-90 bonds amounted to a violation of Article 1, First Additional Protocol. The bonds in question were domestic debt that gave the bearer the right to buy consumer goods. In 2000, Russia restructured its domestic debt. The bonds in question, however, were excluded from this restructuring, and only settled by special federal law. The Russian government delayed implementation of this special settlement year after year.

83 84 85

86

Les saints monaste`res v Greece, para. 71. Lithgow v United Kingdom, para. 121. Commission Paye, Report, November 1999. A challenge before the Conseil Constitutionnel on this ground failed, Journal officiel, 31 December 1999, 20012. Leschi v France (1998); Thivet v France; Abrial v France.

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The Russian Constitutional Court upheld a challenge to the legality of the implementing legislation. It noted that claims by individual bondholders should not excessively and adversely affect the budgetary resources allocated for satisfying the rights and interests of society as a whole. This principle becomes particularly relevant in a situation where the budgetary resources are insufficient to resolve many social problems relating to the rights to life and personal dignity. It follows that the balance between the rights and lawful interests of the individuals who act as creditors for the State in property relationships, on the one hand, and everyone else, on the other hand, may, in principle, be struck only in the form of an act of Parliament.87

The applicants contended that Russia’s failure to pay the bonds amounted to an interference with their protected possessions. The special federal law did not provide for any remedies, and the successive suspensions of payments rendered their rights under the bonds illusory. They accepted that difficult financial conditions may justify strong limitations on compensation to bondholders, but pointed out that the Russian Federation was now in an enviable budgetary position, with routine budget surpluses. The government contended that the bonds did not amount to ‘possessions’. The ECHR affirmed that the applicants’ right to redeem the debt arising out of the Urozhay-90 bonds amounted to a ‘possession’. To some degree, the ECHR agreed with the Russian Constitutional Court on the need to take due account of the financial conditions prevailing in Russia at the time. It recognised that Russia’s ‘economic well-being was further jeopardised by the financial crisis of 1998 and the sharp devaluation in the national currency . . . the Court agrees that defining budgetary priorities in terms of favouring expenditures on pressing social issues to the detriment of claims with a purely pecuniary nature was a legitimate aim in the public interest’.88 The ECHR concluded nonetheless that Russia was under an obligation to ensure the legal and practical conditions for the implementation of the right to possessions. From 1995 to 2009, the Russian government took no steps to satisfy the claims arising out of the bonds. The court affirmed that the persistent uncertainty thus created for claimants about their legal position violated Article 1, First Additional Protocol. Russia was bound to pay the full nominal of 2,000 euros to all the applicants on account of non-pecuniary loss. 87

Malysh v Russia, para. 54.

88

Ibid., para. 80.


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In Kovacic v Slovenia, the ECHR examined an application by three Croatian nationals for compensation on their hard-currency deposits, guaranteed by Yugoslavia, in the Zagreb office of a Slovenian bank, before Yugoslavia dissolved.89 Their accounts had been frozen in 1988 as an emergency response to the then prevailing hyperinflation. The applicants and Croatia took the view that the Slovenian bank or Slovenia were liable for these deposits. Slovenia maintained that the debt ought to be divided among all successor states. The ECHR struck out the case. It noted that the successor states had negotiated the Vienna Agreement on Succession Issues.90 Moreover, a resolution of the Parliamentary Assembly of the Council of Europe dealt specifically with foreign exchange deposits in the bank outside Slovenia.91 The resolution noted that ‘the matter of compensation for so many individuals would best be solved politically between the successor States’. The intervening former Yugoslav states requested that the court examine the circumstances of Yugoslavia’s break-up, its banking system and state succession into debts. The ECHR pointed out that it had received thousands of such applications. The court said it fully subscribed to the Parliamentary Assembly’s resolution. It further noted several negotiation rounds between the successor states on the open issues, and called on the states to proceed with these negotiations as a matter of urgency. Two of the claimants had managed to obtain compensation in Croatian courts since submitting the application to the ECHR, which raised the prospect that the third claimant could also reasonably expect to succeed.

C. Creditor claims before the Iran–US Claims Tribunal The Iran–US Claims Tribunal possesses jurisdiction over claims of nationals which ‘arise out of debts, contracts (including transactions which are the subject of letters of credit or bank guarantees), expropriations or other measures affecting property rights’.92 The two state parties explicitly consented to the Tribunal’s jurisdiction over contractual claims. The United States and Iran established the Tribunal in the 89 90 91 92

Kovacic v Slovenia. Vienna Agreement on Succession Issues, signed 2 June 2004. Resolution 1410 Council of Europe Doc. 10135, 23 November 2004. See Article II (1) of the Claim Settlement Declaration; G. Aldrich, The Jurisprudence of the Iran–United States Claims Tribunal (Oxford University Press, 1996), 2ff.

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Algiers Accord – an element in the resolution of the Teheran hostage crisis. It is a permanent arbitral body situated in The Hague composed of three judges drawn from Iran, three from the United States and three from third countries. In Starrett Housing v Iran, the plaintiff had extended a loan to a company which it contended had been expropriated by Iran. The tribunal ruled in favour of the plaintiff and found a ‘well-settled rule of customary international law that a taking of one’s property right may also involve a taking of a closely related ancillary right’.93 However, the Tribunal’s analysis in Starrett Housing is contradictory. On the one hand, it broadly defined the claimant’s property rights to include the right to be repaid the loans. The Tribunal noted, however, that the ‘Claimant’s property rights in the Project were intimately linked to their rights to be repaid such loans.’94 The right to repayment is only closely ancillary to a property right, not a property right in itself. In Uiterwyk v Iran, the former general shipping agent for Iran Express Lines in the United States sought to recover on certain loan claims amounting to $14 million, which Uiterwyk Corporation had guaranteed. Uiterwyk was awarded compensation of $2.6 million on three loans which it had contracted to cover the expenses of Iran Express Lines and $22,500 on bonds it had posted to prevent the liquidation of SMP, another respondent in the case.95 The Tribunal resolved the dispute by straightforward application of contractual principles and found in favour of the claimant. In Dallal v Iran, the Iran–United States Claims Tribunal held that Article VIII Section 2(b) of the IMF Articles of Agreement prevented enforcement of bounced cheques drawn by Bank Mellat against Chase Manhattan Bank and held by Dallal.96 In the view of the majority, the mutual recognition of exchange control regulations applied not only in national courts, but also before international tribunals. Moreover, the claimant, not the defendant, bore the burden that the measures 93

94

95 96

Starrett Housing v Iran (Final Award), para. 361 (relying on R. Higgins, ‘The taking of property by the state: recent developments in international law’, Recueil des cours, 176 (1982), 259–392, 323, 340; Shufelt v Guatemala Case (1949), II UNRIAA, 1079, 1097). See also the discussion of the case in the context of expropriation, on page 180. Starrett Housing v Iran (Final Award) (liable for promissory notes of insolvent enterprise affirmed). Uiterwyk v Iran. Dallal v Iran, Bank Mellat; see 75 ILR 151 for related proceedings in English courts.


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were not valid exchange control regulations or that they were outside the scope of ‘exchange contracts’. The claimant’s claim for compensation failed. Judge Holtzmann, dissenting, took issue with this distribution of the burden of proof.97 In Holtzmann’s view, it was the respondent bank which had to show that the cheques were issued contrary to Iranian exchange control regulations. The Tribunal wrongly applied Article VIII Section 2(b), since neither party had raised this contention before the Tribunal. Moreover, refusal to pay on the ground of exchange control violations would offend universally recognised principles of fairness which took precedence over Article VIII Section 2(b). Domestic settlement institutions have been somewhat more welcoming to creditor claims than mixed claims commissions, the ECHR and other arbitral tribunals98– a theme explored in the next section.

D. Creditor claims before foreign claims commissions Claims based on unsecured debts such as dividends or loans before the United States Foreign Claims Settlement Commission often failed.99 In Howard v Yogoslavia, the Commission ruled that an unsecured loan to a Yugoslavian corporation was outside the scope of the 1948 Yugoslav Claims Agreement. At the same time, it affirmed that the enterprise itself was taken.100 In contradistinction to the enterprise, the loan could not be taken. The Yugoslav Claims Agreement of 1948 explicitly excluded Yugoslav dollar bonds, in light of explicit assurances by Yugoslavia that such debts would be paid. Prior to the signing of the agreement, Yugoslav legislation provided for partial repayment of dinar bonds. 97

98

99

100

3 Iran–US CTR. In support of Judge Holtzmann, Aldrich, Jurisprudence of the Iran–US Claims Tribunal, 390, 395. Laredo v Mexico (debt of a Mexican company whose assets were seized by the government compensable); McIntosh v Mexico (bondholder); General Finance v Mexico (mortgage bonds); Hofmann and Steinhardt v Turkey (US v Turkey) (American bonds issued by private railway). Unger v Czechoslovakia; Poras v Czechoslovakia; Simonek v Czechoslovakia; Hexner v Czechoslovakia; Smolik v Czechoslovakia; Mellon Bank v Cuba (unsecured debts of financial institutions beyond the FCSC’s jurisdiction); Groetzinger v GDR. Howard v Yugoslavia. The 1948 Yugoslav Agreement provided for US$17 million in lumpsum compensation. International Claims Settlement Act of 1949. Smyth v Yugoslavia (debt against private party for goods sold) and Universal Pictures v Yugoslavia (debt for rental fee on motion picture); American Cast Iron Pipe v Cuba (debt due from an enterprise nationalised by Cuba taken).

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The debt remained valid and had not been taken by Yugoslavia. The agreement, in which Yugoslavia recognised the general validity of its debt obligations, provided for an automatic discharge of debt obligations to owners of enterprises who received compensation for their stake in such companies. The silence of the agreement on dinar bonds did not imply that purchasers of such bonds could obtain compensation under the 1948 agreement. The Commission relied on the language of the agreement and the statute’s legislative history. The relevant Senate report explained: the rationale for this provision was that creditor-owners, if they obtained dollar compensation for a taking of their enterprise, this ipso facto discharged any debt obligation owed to the taken company denominated in dinars, since the company owner would be in a position to enter questionable debts into the company’s books. The report also notes that the agreement does not cover creditor interests. It is limited to ownership interests in property, either legal or beneficial, which is consistent with traditional United States policy on diplomatic protection.101

Only mortgage claims and other similarly secured claims fall generally within the US Foreign Claims Settlement Commission’s remit.102 In re Claim of European Mortgage, the FCSC construed its authority with respect to creditor claims narrowly. It emphasised, however, that this was the result of the peculiar treaty language. Specifically, it did not imply that ‘a creditor claimant could under no circumstances show himself entitled to recover, particularly under a statute with different background, history and language’.103 Bank accounts may also qualify104 but that is a far cry from saying that creditor claims are compensable under international law generally.

Settled sovereign bonds In Malan v Italy, the Commission declined a claim arising out of various pre-war Italian municipal bonds guaranteed by the Italian central government. In the Italian–US Peace Treaty, Italy undertook to settle its pre-war contractual obligations, including bonds. Italy restructured these bonds in a bond exchange. The Commission equated the bondholders’ failure to participate in the bond exchange with a failure to exhaust all 101

102

103

Senate Report Nos. 810 and 811, 81st Cong., 1st Session, Report on the 1949 International Claims Settlement Act. Singer Manufacturing v Soviet Union; Howard v Yugoslavia (rejected unsecured creditor claim); Brunner v Yugoslavia; Skins Trading Corporation v Czechoslovakia. 104 FCSC D&A, 337. Elastic Stop Nut v Cuba; de Lattre v Cuba; Mende v GDR.


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available remedies, ‘inasmuch as the adjustment of certain unrepatriated bonds has been authorised and provision for the settlement of pre-war contractual obligations, including bonds, has been made’.105 Similarly, the Commission declined liability upon bonds of the Italian Postal Savings Bank.106 In Friedlander v Italy, the claim of a bondholder against an Italian shipping company whose vessel was seized by the US government during the war failed because the Treaty of Peace discharged the bond.107 This is one example of the successful restructuring of sovereign debt obligations by international treaty. In Schwarting v Bulgaria, the Commission found that it lacked jurisdiction over claims relating to the failure of the government of Bulgaria to pay its bond obligations, a contractual right expressed in US dollars.108 The bonds at issue were the Kingdom of Bulgaria 7% Settlement Loan of 1926 and the Kingdom of Bulgaria 7½% Stabilization Loan of 1928. The Commission noted that the settlement of these claims based upon bonds issued by Bulgaria were provided for in a previous claims programme administered by the Commission. In Beyl v Romania, the FCSC held that it lacked jurisdiction to determine claims arising out of Romania’s sovereign debt, where the dollar bonds in question had been the subject of a settlement between the US and the Romanian government.109 The Commission referred to the settlement agreement of 1960 that settled, among others, ‘claims predicated upon obligations expressed in currency of the United States of America arising out of contractual or other rights acquired by nationals of the United States of America prior to September 1, 1939 and which became payable prior to September 15, 1947’.110 The settlement agreement provided for payments to claimants under a previous settlement programme. The bondholder’s argument that he had no notice of that previous programme was to no avail.

Jurisdiction over sovereign bonds In Siegel, the Commission first issued a proposed decision denying claims for compensation on defaulted Imperial Russian government bonds denominated in roubles. It found that only dollar bonds fell within 105 108 110

106 107 Malan v Italy. De Marco v Italy. Friedlander v Italy. 109 Schwarting v Bulgaria. Beyl v Romania. Article I (1) of the Agreement between the United States of America and the Romanian People’s Republic Relating to Financial Questions between the Two Countries, 30 March 1960, 11 UST 317; TIAS 4451 (1960).

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the Commission’s purview. Prior to issuing its final decision, the Commission held a consolidated hearing since so many US bondholders were affected by the matter. After the consolidated hearing, the Commission changed course. It now held that because the US legislation was remedial legislation, the International Claims Settlement Act 1949 ought to be construed liberally. US banks had actively solicited investments in Russian rouble bonds. In repudiating, Russia drew no distinction between dollar and rouble bonds. For these reasons, the claimant was entitled to relief independent of the currency denomination, including domestically denominated debt.111 In dissent, Commissioner Clay noted that ‘we are charting new courses into heretofore unknown and untested areas of international law’.112 He dwelt on whether claims not ordinarily espoused by the United States for diplomatic presentation gave rise to international claims. The commissioner emphasised the policy rationale for nonintervention on sovereign defaults: ‘this government is not a collection agency, and cannot assume the role endeavoring to enforce contractual undertakings freely entered into by its nationals with foreign states’.113 Commissioner Clay affirmed that claims relating to debts or evidence of debts were not matters properly espousable under international law. Without question, the Soviet government repudiated its sovereign bonds. But such refusal to admit the binding character of the obligation was not infrequent when a successor government repudiated the debt obligations of a former regime, which it alleged lacked the legal authority to bind the nation. The United States recognition of the Soviet government validated the extraterritorial reach of the Russian repudiation for US territory. In view of the limited monies available for compensation and the fact that the claims presented greatly exceeded that fund, Commissioner Clay then enquired whether the legislative history of the United States Claims Settlement Act contemplated bond claims. He confirmed that this history supported inclusion of dollar bonds only, not rouble bonds.114 111

112 113 114

Siegel v Soviet Union; see also R. Clark, ‘Collecting on defaulted foreign dollar bonds’, AJIL, 34 (1940), 119–25. Siegel v Soviet Union, 277. Ibid. This statement echoes the famous Palmerston Memorandum. H.R. 6382, 11 March 1955 and Hearings before the Committee on Foreign Affairs, House of Representatives, 84th Congress, 1st Session, 37 (1955).


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Finally, the Commissioner noted that rouble bonds had been used as substitutes for money in Russia. The United States owed deference to this ‘unorthodox monetary experiment’. Under the fundamental principle of monetary sovereignty, devaluations of the rouble did not come within the purview of the Commission. In Paige v Yugoslavia, the FCSC considered interest bearing bonds issued by the Kingdom of Yugoslavia prior to World War II.115 It held that the temporary failure of Yugoslavia to pay the bonds or interest thereon on time did not constitute a taking of property. That the Yugoslav government required the registration of the bonds for continued payment of interest also did not amount to a taking. In reaching this conclusion, the FCSC referred to the traditional policy of the US government not to recognise claims against foreign governments arising out of defaulted sovereign bonds. Because there was no specific authority under the International Claims Settlement Act to the contrary, such bonds claims were not compensable. The Commission gave the following policy rationale for its decision: a loan contract between a state and a foreign bondholder is not an international contract nor controlled by international law. Bondholders who purchase such obligations do so upon their own responsibility and at their own risk. An intervention for the payment will not be made by the United States government unless there has been a denial of justice, or unless the breach of contract is considered confiscatory. In lump-sum agreements between governments for compensation of claims resulting from nationalization or other taking of property, claims of bondholders are deemed not be included unless the agreement expressly so provides. No provision for Yugoslav Government bond claims appears in the Yugoslav Claims Agreement of 1964.116

Liability on sovereign bonds Artus v German Democratic Republic concerned gold bonds issued by the Leipzig Trade Fair, an instrumentality of the German Reich, and a dollar bond issued by the Conversion Office of German Foreign Debt, another instrumentality.117 The FCSC denied the claim. It recalled the general rule that mere non-payment of a debt owed by a foreign government does not constitute a taking of property under international law as required by Section 602 of the Act. Hence the loss of the bondholder was not compensable. In the Chalifoux Claim, the Commission awarded compensation on rouble bonds. The claimant was entitled to payment of compensation 115

Paige v Yugoslavia.

116

Ibid., 4.

117

Artus v GDR.

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in dollars, converted into dollars at the exchange rate on the day of the formal repudiation by the Russian government.118 Likewise, the Commission in Riis v Soviet Union gave compensation at the guaranteed rate of exchange contained in rouble-denominated Imperial bonds.119 In the Green Claim, the Commission upheld a claim on short-term Imperial Russian war bonds denominated in roubles. While the nationality of the holder was unknown for a period of four years until the claimant, a US national, acquired the bonds, the court presumed continuous ownership by US citizens.120 Yet, the Commission reversed this presumption when the bonds in question were not regularly traded on the US market and denied such a bondholder’s claim.121 In the Riis Claim, the Commission gave compensation for bonds issued by a Russian political subdivision, the City of Kharkov, even in the absence of a sovereign guarantee.122 Bondholders also obtained compensation on bonds denominated in foreign currency. The FCSC affirmed liability for repudiated roubledenominated bonds,123 and also held that a state guaranteed bond of a private enterprise was compensable under Section 305.124 Moreover, it even affirmed liability when the repudiation made bonds used as collateral for a loan worthless.125 In Sisam and Frankenbusch, a unilateral Czechoslovak debt restructuring of US dollar bonds prolonging their maturity and even reducing the interest rate payable was deemed non-compensable.126 The Commission limited or denied compensation in a number of similar cases. For instance, it held that interest was only compensable up to 10 February 1918, when principal became due and payable.127 The Commission also denied a claim where the purchaser of Imperial government bonds had sold debt instruments at a loss.128

Lack of standing In the Nash Claim, the FCSC denied standing to a US national who held defaulted Yugoslav bonds. Yugoslavia had earlier excluded international obligations and dollar bonds issued or guaranteed by predecessor Yugoslav governments from debt service. Sovereign bonds, the Commission concluded, were outside the constitutive 1948 agreement providing for jurisdiction.129 118 121 124 126 128

119 120 Chalifoux v Soviet Union. Riis v Soviet Union. Green Claim v Soviet Union. 122 123 Zentler v Rumania. Riis v Soviet Union. Siegel v Soviet Union. 125 Rogers v Soviet Union. Guaranty Trust v Soviet Union. 127 Sisam v Czechoslovakia; Frankenbusch v Czechoslovakia. Harris v Soviet Union. 129 Baird v Soviet Union. Nash v Yugoslavia.


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The Commission found that there was no standing based on the absence of US diplomatic intervention. In support of its decision, the Commission cited the longstanding view that a contract between a foreign state and a bondholder was neither an international contract nor a contract controlled by international law. Diplomatic interposition presupposed a denial of justice or taking of the bond. While the bonds had been in default for many years, the Yugoslav government did not enact any law affecting the dollar bonds which could amount to a taking. In Geller, the Commission denied relief to a holder of Hungarian bonds, because the claimant did not fulfil the nationality requirement under Section 303(3) of the International Claims Settlement Act at the relevant time (in 1939). He only acquired US nationality subsequent to the purchase of the bonds.130 Commissioner Clay, dissenting, found that the international wrong occurred at the time of default or repudiation. At that time the claimant had already acquired US nationality, and was hence entitled to compensation.

Trustees Trustees have for a long time played a central role in sovereign finance. They look after the interests of the scattered and numerous bondholders and ensure that interest and principal are paid in a timely manner. Yet, in a series of cases, the FCSC found that the bondholder trustee lacked standing to bring claims on behalf of bondholders.131 These claims failed because the trustees could not show a loss to themselves. However, the timely filing of a claim by the trustee preserved the rights of bondholders against potential lapse.

UK Foreign Compensation Commission The British equivalent, the Foreign Compensation Commission, has also dealt with several sets of sovereign bond cases.132 The Foreign Compensation 130 131

132

Geller v Hungary. Morgan Guaranty Trust Company of New York, as Trustee v Cuba (claim by trustee of $5 million Cuban Railroad Company secured bonds for failure to pay on behalf of thirty-six potential bondholders); First National City Bank v Cuba (trustee brought claims on more than $218 million of bonds of Cuban state-owned companies to preserve bondholder claims). R. B. Lillich, International Claims: Postwar British Practice (Syracuse University Press, 1967); S. W. Magnus, ‘The Foreign Compensation Commission’, ICLQ, 37 (1988), 975–82; A. Drucker, ‘Compensation for nationalized property: the British practice’, AJIL, 49 (1955), 477–86; E. A. S. Brooks, ‘Registration of international claims under the Foreign Compensation Act 1950’, Transactions of the Grotius Society, 44 (1958), 187–98.

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Act 1950 established the Commission to deal with compensation received from foreign governments. The Foreign Compensation Commission operates under orders in council, without direct reference to international law.133 The 1950 Act followed earlier agreements for the compensation entered into with Yugoslav and Czechoslovak governments. Section 3 of the Act provides that the Commission will register and determine claims, and distribute compensation payable by foreign governments under future agreements. Its awards are confidential for a period of seventy to eighty years. In Anisminic, a challenge to the Act’s exclusion from judicial review succeeded.134 This opened up the prospect of litigation by claimants unsatisfied with the outcome of the adjudication by the Foreign Compensation Commission. The availability of relief for creditors depends in large part on the specific statutory instrument for lump-sum settlement. The UK–Bulgarian Agreement of 1955 discharged all liability of the Bulgarian government and its nationals arising from debts, claims and obligations. The UK–Poland Agreement of 1954 barred the Commission from entertaining claims ‘in respect of a debt arising out of a bond or in respect of a loss sustained as a result of Polish measures affecting any security constituted under a bond, if the bond formed part of a public issue’.135 In 1957, an amendment to the Polish order in council defined covered debts more broadly: ‘(i) a debt arising out of a contract existing on 01/09/1939 to which a British national was a party, and which is a debt the payment of which has been guaranteed by the Polish Government, (ii) a debt arising out of a bill or note guaranteed by the Polish Government, (iii) a debt arising out of a contract existing on 01/09/1939, between a British national and the Polish Government, or between a British national and an enterprise which was on that date owned, managed, or controlled by the Polish government, (iv) a debt arising out of a bond which was a Polish internal issue and which carried, on 01/09/1939, a guarantee of the Polish government’.136 The UK–Romanian agreement settled all claims arising out of British property by Romanian measures in return for £3.5 million. It included all bonds of Romanian public debt.137

Settling the Tsarist debt Settling the Soviet repudiation of Tsarist debt was more complicated. A Russo-British trade agreement of 1921 left the matter essentially open 133 134 136

Lillich, International Claims, 7; Van Houtte, Post-War Restoration, 41. 135 Anisminic v Foreign Compensation Commission (1969). SI 1957, No. 101. 137 SI 1957, No. 1366, Section 2. UK–Romanian Agreement, 1976, No. 9.


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for future negotiations.138 The British government promised not to allow any attachment of property or assets used by the Soviet Union in its external trade, backed up by a Soviet right to terminate if violated. The two governments renounced all claims to government property located in their respective territories. They also agreed to refrain from transferring any funds or other property under their control to any claimants pending the conclusion of a final settlement. The declaration of recognition of claims accompanying the treaty explained that obligations by existing or former governments would be dealt with by a general treaty. Russia recognised its obligations to pay unpaid suppliers of goods and services. However, no mention was made of bondholders and creditors. It was only said that the explicit mention of suppliers does not create a preferential right of payment for them as compared to unmentioned classes of claims. A 1986 settlement agreement between the UK and the USSR contained an undertaking by the UK not to pursue any further claims that arose prior to 01/01/1939, and mentions specifically ‘any bond issued or guaranteed before 07/11/1917 by a former Government or authorities of the Russian Empire’,139 as well as ‘any debt due before 01/01/1939, owed by a former Government of the Russian Empire, Russian Provisional Government, or the USSR’. The Soviet Union, in return, renounced any claims for assets located in the UK for gold transferred to the UK by the former Imperial Russian Government or the Russian Provisional Government and gold transferred to the German Government under the Treaty of Brest-Litovsk. Each country took responsibility for the settlement of certain property and financial claims brought by its own citizens against the other.

The Anglo-Soviet Claims Agreement of 1968140 Article 4 of the agreement settled the claims of holders of the Lena and Tetiuhe notes ‘irrespective of the nationality of such holders’.141 The justification for Article 4, which is restated in Article 24 of the Order, 138 139

140

141

Trade Agreement (UK–Russia), 16 March 1921, AJIL 16 (1922), 141–47. 1986 Agreement concerning the Settlement of Mutual Financial and Property Claims arising before 1939 (UK–USSR); Foreign Compensation (USSR) (Registration and Determination of Claims) Order 1986. Schedule 1, External Bonds, set out the types and issues of sovereign bonds covered. 1968 Agreement concerning the Settlement of Mutual Financial and Property Claims (UK–USSR). National Archives (UK), Claims against the Soviet Union by Lena and Tetiuhe Notes Holders, FO 371/116762.

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is based on the equitable grounds that those holders suffered loss as a result of Soviet retaliation for the British blocking the Baltic gold in defence of British interests.142 An order in council implemented the broader settlement.143 It provided for the distribution in respect of qualified claims concerning, among others, ‘(d) shares in and securities issued by public companies, (e) debts of any kind secured or unsecured . . . (g) Government and Municipal bonds, (h) Tetiuhe and Lena Notes’.144 In assessing the amount of any claim under the Order, the Commission was bound to take into account compensation already received in respect of that claim or that the person might reasonably expect to receive from any source. The Foreign and Commonwealth Office received more than 4500 claims on over 800,000 Tsarist individual bonds, which accounted for more than two-thirds of total claims under the Russian programme.145 Almost 10,000 potential bond claimants had requested application forms, but many did not return them, probably due to the nationality requirement. Claims relating to more than 720 bond types were submitted.146 Where bonds were held in trust, the Commission looked to the nationality of the beneficiary, rather than the trustee.147 The total value of bond claims exceeded £28 million, out of total claims of £126 million.148 A substantial number related to private debt guaranteed by the government (sixty different railway companies, thirty cities, including the City of Moscow with 42 guaranteed issues between 1883 and 1917).149 The value of sterling bonds was determined on the basis of their face value, with 7 per cent interest per year from 2 July 1940 to 12 February

142 143

144

145

146

147 148

149

R. B. Lillich, ‘The Anglo-Soviet Claims Agreement of 1968’, ICLQ , 21 (1972), 1–14, 6. The Foreign Compensation (Union of Soviet Socialist Republics) Order 1969, SI 1969, No. 735. In Weilamann v Chase Manhattan Bank (1960), one enforcement attempt by a Lena noteholder in New York failed. Foreign Compensation Commission, Report to the Foreign and Commonwealth Office on the Russian Bond Programme, 22 June 1988, 1; National Archives (UK), ‘Private claims by British subjects against the Soviet Union including outstanding pre-revolution claims’, FO 371/11671. Foreign Compensation Commission, Report to the Foreign and Commonwealth Office on the Russian Bond Programme, 22 June 1988, 2. Ibid. Foreign Compensation Commission, Report, Russian Fund, Preliminary Review of Property Applications made under the 1986 Order, 21 September 1987, 6. Foreign Compensation Commission, Interim Report, 14 October 1987, 3.


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1967. More than 30 per cent of bonds in value terms were denominated in roubles, 16 per cent in gold or silver roubles, 36 per cent in sterling, 8 per cent in French francs, 5 per cent in German marks, and the rest in other currencies.150 Almost half of the debt was owed by railways, and benefited from a state guarantee, with 30 per cent owed by states and 24 per cent by cities.151 Shareholders or debenture holders of Russian companies could not present claims under the 1986 Order. These could only be pursued by the company itself. Surprisingly, many British nationals held rouble-denominated bonds issued only in Russia. When Russia introduced exchange controls in 1914, British companies and individuals may have had little choice but to buy domestic debt.152 The 1986 Order required the physical presentation of the bonds to the Commission. Compensation was conditional on surrendering the bonds to the Commission for destruction.153 A number of claims were denied due to lack of presentation of the debt instrument in question.154 However, registration in the 1918/1951 register of claims (two earlier attempts to draw up lists of creditors where proof of ownership was required) sufficed, with no need to present the bond.155 The Commission rejected 381 bond claims. Claimants withdrew a further 492 bond claims after discussion between the Commission and the claimant. The programme only provided for payments of sterling-denominated bonds. Rouble-denominated debt was not compensable. In December 1987, a first interim distribution of 10 per cent was made to bondholders (nearly £3 million), many of whom were elderly.156 A second interim distribution of 20 per cent occurred in December 1989. By comparison, property claimants received 30 per cent. In June 1990, a final distribution 150

151 152 153 154 155

156

Foreign Compensation Commission, Distribution of the Russian Fund, Status Report, 25 February 1987; Foreign Compensation Commission, Interim Report, 14 October 1987, 11. Foreign Compensation Commission, Interim Report, 14 October 1987, 12. Ibid. Article 8(1)(c), Foreign Compensation (USSR) Rules Approval Instrument 1987. Foreign Compensation Commission, Interim Report, 14 October 1987, 3. E.g. Claim of Jane Fischer Alexander, 25 November 1918 (Russian Government 5% Gold Bond 1906 series); Clara Davidson, 17 January 1922 (Russian 4% Gold Loan 6th June 1894); William Eastwood, 22 April 1933 (5% Internal Loan 1914 Issue). All examples of registered bonds contained in the Russian File of the Foreign and Commonwealth Office. Foreign Compensation Commission, The Russian Fund, Report on Status as at 21 September 1989, 15.

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of 25 per cent was made.157 Bondholders recovered 20 per cent of the face value of their claims.158 Particular problems arose in connection with gold rouble bonds. Russia abolished them long before the Revolution and provided for their conversion into ordinary roubles.159 The time limit for bringing claims was only twenty-six months – a strict requirement under Article 4. A number of claimants failed to meet this period of limitation and had their claims time-barred as a result.160

Settling sovereign debt claims arising out of China’s repudiation Under the UK–China Agreement of 1987, the UK undertook not to pursue any claims arising prior to 1980 – in particular, claims relating to any foreign debts incurred before 1949 by successive former Chinese governments, including any bonds issued or guaranteed.161 China paid £23.5 million in exchange for the settlement. A statutory instrument sheds further light on the treatment of sovereign debt under the Agreement.162 Under Section 2, settled debt includes ‘a bond or other document of title in respect of a loan or obligation issued or guaranteed by a public authority in the territory except one denominated in a currency other than a Chinese currency’. More than 2,000 bondholders registered Chinese bonds with a face value of £13 million with the Foreign Compensation Commission. The Commission upheld about 1,100 of these registered claims. The total payout amounted to £151,000 for a recovery of five per cent on average for bondholders.163

The British settlements with Czechoslovakia and Hungary The UK–Czechoslovakia Agreement of 1949 on Inter-Governmental Debts fixed the total indebtedness of the Czechoslovak Government to the UK at some £14 million (£1.6 billion, £365 million), and outlined a payment plan of 24 instalments and interest rates.164 157 158 159

160 161

162

163 164

Russian Programme, Report on Property Claims, 8 June 1990. ‘£30 million payout for revolution victims’, Evening Standard, 22 November 1989, 15. Foreign Compensation Commission, Report to the Foreign and Commonwealth Office on the Russian Bond Programme, 22 June 1988, 3. Ibid., 4. 1987 Agreement concerning the Settlement of Mutual Historical Property Claims (China–UK). 1980 SI No. 1720; further guidance in 1987 SI No. 2201, including providing for specific definitions on bonds and shares. ‘Chinese bondholders paid interim 5 pc by Peking’, Evening Standard. UK–Czechoslovakia Agreement, 1949 No. 61, Agreement on Inter-Governmental Debt.


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Deprivation of legal title by a Czechoslovak measure was required.165 The Commission was to register ‘a claim in respect of a debt . . . outstanding to a British national from the Czechoslovak Government or municipal authority in Czechoslovakia or from a person, corporation, firm, or association (other than a British national) resident in Czechoslovakia’.166 The categories of eligible debts were enlarged in 1961 to include ‘a claim in respect of a debt which on the first day of November 1945, was outstanding from the Czechoslovak Government or from a municipal authority in Czechoslovakia or from a person, corporation, firm or association (other than a British national) resident in Czechoslovakia’.167 In 1982, a UK–Czechoslovakia Agreement settled outstanding claims. Under the Agreement, the Czechoslovak Government paid some £24 million to the UK in settlement of all remaining claims by UK nationals. Article 2(2) discharged certain intergovernmental debts owed by the Czechoslovak Government. The UK was to inform the Tripartite Commission for the Restitution of Monetary Gold to release the gold to the Czechoslovak Government. The Czechoslovak Government was released from all obligations to the UK Government outstanding from the 1949 Agreement on Inter-Governmental Debt. Under the UK–Hungary Agreement of 1956, the Hungarian Government paid the UK some £4 million, in settlement of all commercial and banking transactions, balances held in Hungarian banks, UK Treasury debenture stocks, other insurance debts, and British property affected by Hungarian measures. In addition, £450,000 (£40 million, £8.5 million) was to be paid in settlement of short-term credit granted by British nationals to the Hungarian Government or nationals, and unpaid matured Treasury Bills of the Hungarian Government. Article 7 extinguished all obligations of the Hungarian Government to the UK arising out of these debts.168 The next section reviews the protection of contractual claims in investment law against expropriation.

E.

Creditor claims in arbitration

In principle, contractual rights are capable of being expropriated. Some arbitral awards affirm the expropriability of contractual rights. However, an analysis of this line of cases suggests that, as a general rule, 165 168

166 SI 1952 No. 348. SI 1960 No. 849. UK–Hungary Agreement, 1956, no. 30.

167

SI 1961 No. 585.

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only some, rather than all contractual rights may be expropriated. There is considerable uncertainty concerning the scope of appropriable contractual rights, and the application of the rules on expropriation to contractual rights.

Contractual rights generally In the Norwegian Shipowners’ Claim, an arbitral tribunal operating under PCA rules held in a case concerning contracts between individuals and US docks for the construction of ships that contracts may be the subject of expropriation.169 The tribunal noted that the United States’ intention was to ‘take’, and they did in fact take the contracts under which the fifteen hulls in question were constructed. It explained that these ‘contracts were the property, or created it. What the United States calls “physical property” is only one of the elements or aspects of the “property”.’170 In SPP v Egypt No. 2, the ICSID tribunal affirmed the expropriability of contract rights: ‘Nor can the tribunal accept the argument that the term “expropriation” applies only to jus in rem . . . there is considerable authority for the proposition that contract rights are entitled to the protection of international law and that the taking of such rights involves an obligation to make compensation therefor.’171 The Wena Hotels v Egypt tribunal also recognised that ‘an expropriation is not limited to tangible property rights’.172 By contrast, in Impregilo, the tribunal sounded a more cautious approach, and recognised that ‘the taking of contractual rights could, potentially, constitute an expropriation or a measure having an equivalent effect’.173 In RFCC v Morocco, the tribunal affirmed that ‘des droits issus d’un contrat peuvent eˆtre l’objet de mesure d’expropriation, a` partir du moment ou ledit contrat a e´te´ qualifie´ d’investissement par le Traite´ lui-meˆme’.174 Likewise, the Bayindir tribunal explained that ‘it is not disputed that expropriation is not limited to in rem rights and may extend to contractual rights’.175 In Mondev v USA the tribunal affirmed a broad scope of protection: ‘it is clear that the protection afforded by the prohibition against expropriation or equivalent treatment in Article 1110 can extend to 169 171 172 173 174 175

170 Norwegian Shipowners’ Claim. Ibid., 334. SPP v Egypt (Jurisdiction), para. 164. Wena Hotels v Egypt (Award), para. 98. Impregilo v Pakistan, para. 274. RFCC v Morocco (Merits), para. 60. Bayindir v Pakistan (Jurisdiction), para. 255.


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intangible property interests, as it can under customary international law’.176 Methanex v USA also put forward a broad general concept of property: ‘the restrictive notion of property as a material “thing” is obsolete and has ceded its place to a contemporary conception which includes managerial control over components of a process that is wealth producing’.177 BITs lend considerable support to the view that intangible property, including rights arising from a contract, is susceptible to expropriation in much the same way as tangible property.178 However, they do not explicitly address whether default equals expropriation. Scholars similarly maintain that expropriation covers tangible and intangible rights. For instance, according to Higgins: ‘Sometimes rights that might seem more naturally to fall under the category of contract rights are treated as property.’179 Sacerdoti similarly maintains that: ‘All rights and interests having an economic content come into play, including immaterial and contractual rights.’180 Conversely, Douglas emphasises the need to distinguish rights in rem and in personam: ‘If the distinction between contract and property is blurred in respect of the threshold question of whether a qualifying investment has been made by the claimant, the consequential error will be the tribunal’s application of the substantive obligations of investment protection to a contractual dispute.’181 Commissioner Nielsen, dissenting in International Fisheries Company, equated all breaches of contract to violations of international law: in the ultimate determination of responsibility under international law I think an international tribunal in a case grounded on a complaint of a breach of contract can properly give effect to principles of law with respect to confiscation . . . If a government agrees to pay money for commodities and fails to make payment, it seems to me that an international tribunal may properly say that the 176 177 178

179

180

181

Mondev v USA (Merits), para. 98. Methanex v USA (Merits), Part IV Chapter D, para. 17. M. Reisman and R. Sloane, ‘Indirect expropriation and its valuation in the BIT generation’, BYBIL, 74 (2004), 115–50; C. F. Schreuer, ‘The concept of expropriation under the ECT and other investment protection treaties’, in C. Ribeiro (ed.), Investment Arbitration and the Energy Charter Treaty (Huntington, NY: Juris Publishing, 2006), 108–58, 139; A. Reinisch, ‘Expropriation’, in C. Schreuer et al. (eds.), The Oxford Handbook of International Investment Law (Oxford University Press, 2008), 2. R. Higgins, ‘The taking of property by the state: recent developments in international law’, Recueil des cours, 176 (1982), 271. G. Sacerdoti, ‘Bilateral treaties and multinational instruments in investment protection’, Recueil des cours, 269 (1997) 381. Douglas, Investment Claims, 202–09.

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purchase price of the commodities has been confiscated, or that the commodities have been confiscated or that property rights in a contract have been destroyed or confiscated.182

Similarly, Commissioner Findlay in the Venezuelan Preferential Case emphasised that ‘a claim is none the less a claim because it originates in contract instead of in tort. The refusal to pay an honest claim is no less a wrong because it happens to arise from an obligation to pay money instead of originating in violence offered to persons or property.’183

Sovereign debt as property Feilchenfeld and Borchard are among the few leading scholars who examined the international law of public debt in detail. Their views on whether sovereign bonds may be expropriated diverge sharply. According to Feilchenfeld: ‘Debts are property rights; as property rights they are protected by the general rule of maintenance recognised in international law. This rule is not restricted to tangible property.’184 Yet caveats apply before reaching the conclusion that sovereign bonds are contract rights subject to expropriation. Borchard, by contrast, reserved ‘a distinct branch of the subject’ for claims arising out of unpaid sovereign bonds held by the citizens of another country: ‘[unpaid bonds] of the State differ in many respects from the contractual obligations arising out of a contract for concessions or the execution of public works’.185 Borchard’s two other categories are claims arising out of contracts between nationals of different countries and claims arising out of contracts between the citizen abroad and a foreign government. He called on arbitral tribunals to decline jurisdiction or exercise more careful scrutiny than over an ordinary contractual cause of action. Drago also viewed sovereign debt as special, and drew an analogy to paper money: ‘bonds . . . are put into circulation like paper money’.186 Hall disagreed with this ‘artificial’ distinction between sovereign debt and other contractual claims. He explained: 182 183 184

185 186

International Fisheries v Mexico (US v Mexico), 269. Moore, Arbitrations, vol. 4, 3649. E. H. Feilchenfeld, ‘Rights and remedies of holders of foreign bonds’ in S. E. Quindry (ed.), Bonds & Bondholders: Rights and Remedies (Chicago: Burdette Smith, 1934), 203. Borchard, ‘Contractual claims’, 1. L. M. Drago, ‘State loans in their relation to international policy’, AJIL, 1 (1907), 695 and 725.


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It has become a common habit of governments, especially in England, to make a distinction between complaints of persons who have lost money through default of a foreign state in paying the interest or capital of loans made to it and the complaints of persons who have suffered in other ways. In the latter case, if the complaint is thought to be well founded, it is regarded as a pure question of expediency on the facts of the particular case or of the importance of the occurrence, whether the state shall interfere and, if it does interfere, whether it shall confine itself to diplomatic representations, or whether, upon refusal or neglect to give redress, it shall adopt measures of constraint falling short of war, or even resort to war itself. In the former case, on the other hand, governments are in the habit of refusing to take any steps in favour of the sufferers, partly because of the onerousness of the responsibility which a state would assume if it engaged as a general rule to recover money so lost, partly because loans to states are frequently, if not generally, made with very sufficient knowledge of the risks attendant on them, and partly because of the difficulty which a state may really have, whether from its own misconduct or otherwise, in meeting its obligations at the time when it makes a default. Fundamentally, however, there is no difference in principle between wrongs inflicted by breach of a monetary agreement and other wrongs for which the state, as itself the wrongdoer, is immediately responsible. The difference which is made in practice is in no sense obligatory; and it is open to governments to consider each case by itself and to act as seems well to them on its merits.187

The Aspinwall and the Russian Indemnity tribunals likewise rejected ‘various responsibilities of states’.188 Borchard’s reservation of a separate category for bonds relates to the fourth typical feature of an ‘investment’: the association with a commercial undertaking. In this vein, Schreuer highlights that: ‘The law of expropriation proceeds not from a traditional concept of tangible property but from a broad concept of economic rights that are necessary for the investor to pursue its business successfully.’189 Similarly, Wa ¨lde and Kolo write: ‘The key function of property is less the tangibility of “things”, but rather the capability of a combination of rights in a commercial and corporate setting and under a regulatory regime to earn a commercial rate of return.’190 Modern sovereign bonds are free-standing debt instruments that are issued using standard commercial techniques. No bundle of rights is combined to form some business venture. 187 188 189 190

W. E. Hall, International Law, 5th edn (Oxford University Press, 1904), 280–81. Aspinwall v Venezuela; Russian Indemnity (Russia v Turkey), 186. Schreuer, ‘Expropriation’, 24 (emphasis added). T. Wa¨lde and A. Kolo, ‘Environmental regulation, investment protection and “regulatory takings” in international law’, ICLQ , 50 (2001), 811–48, 835 (emphasis added).

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In opposition to the expansive view that sovereign debt may be expropriated, Feller brings the limited protection for sovereign debt in US domestic law into play: the notion that the prevention of the fulfillment of a contract [i.e. also public debt] is a taking of property, goes beyond the existing limits of the law and opens up an unbounded and unexplored range of state responsibility. Even the constitutional law of the United States, with its meticulous conception of ‘due process of law’ has not gone that far.191

One should indeed be quite sceptical whether international law, which traditionally provided lower protection thresholds than the constitutional law in a well-developed municipal legal system, grants much greater protection to owners of property and individuals to whom a contractual obligation is owed. Due precisely to the absence of substantial state liability on sovereign debt in virtually all municipal legal systems, the international adjudication of sovereign debt claims is a pivotal issue for all but the most creditworthy countries – a shrinking category following the financial crisis that started in 2008. In light of these considerations, it remains to be seen whether ICSID tribunals will qualify sovereign bonds as contractual rights subject to expropriation. The next chapter looks at the jurisdictional prerequisites of ICSID arbitration on sovereign debt.

191

Feller, Mexican Claims, 124 (due process clause does not bind the federal government); cf. also Watrin, Essai de construction, 293 (bondholder protection in domestic law is non-existent).

Part II The future role of arbitration on sovereign debt

10

ICSID arbitration on sovereign debt

The multilateral Convention on the Settlement of Investment Disputes between Disputes and Nationals of Other States1 created ICSID as an autonomous international organisation with close links to the World Bank Group. In the past, the World Bank sometimes exercised its good offices over investment disputes. ICSID’s founding aim is to contribute to a stable and positive investment climate. The Convention is ‘designed to facilitate the settlement of disputes between States and foreign investors’ with a view to ‘stimulating a larger flow of private international capital into those countries which wish to attract it’.2

A. ICSID arbitration generally Although ICSID awards do not possess the force of precedent, ICSID arbitral tribunals frequently rely on past awards. Despite their lack of formal precedential value, these awards contribute to the emerging corpus of international investment law. Three arbitrators typically sit on ICSID tribunals. The investor and the host country select one each. The president is appointed jointly by the parties, or, if they fail to agree, by the chairman of ICSID (Article 37 (2) ICSID Convention). Grounds for contesting awards are extremely limited. The ICSID Convention provides only for an annulment procedure in Article 52. ICSID tribunals’ final awards may be challenged before an ad hoc committee which has the power to annul the award in certain narrow circumstances (improper constitution of the tribunal, manifest excess of 1

2

Hereinafter, ‘Washington Convention’ or ‘ICSID Convention’. For an excellent introduction, see L. Reed, J. Paulsson and N. Blackaby, Guide to ICSID Arbitration (The Hague: Kluwer Law International, 2004), 1–9. Report of the Executive Directors, para. 9.

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power, corruption of a member of the tribunal, serious departure from a fundamental rule of procedure). Divergent interpretations by ICSID tribunals of factually similar cases have stoked a debate on the need for an ICSID Appellate Body along the lines of the WTO.3 Bilateral investment treaties (BITs) grant foreign investors certain treaty protections with regard to the behaviour of the host country.4 The ‘host country’ is the country in whose territory an investment is made. For example, the host country commits itself not to expropriate ‘investments’. These behavioural standards in BITs may go beyond the requirements of customary law. In the early days of investment treaty arbitration, individually negotiated arbitration clauses in investment agreements between investor and host country consented to arbitration. BITs provide blanket consent, avoiding the need for consent in each contract.5 Under many BITs, investors enjoy direct access to ICSID arbitration for alleged breaches of treatment obligations. Under the new investment treaty regime of the ICSID Convention, the investor-claimant may take the host country directly to arbitration, without the exercise of diplomatic protection and without exhausting national remedies. Other BITs provide for arbitration under the UNCITRAL or ICC rules. Dispute settlement is removed from the exclusive jurisdiction of the host country. This book focuses on the BITs between Argentina and Germany, Italy and the United States. This is because US, German and Italian citizens are the largest groups of non-participating bondholders. These three BITs are the most relevant for holdout arbitration against Argentina. ICSID tribunals apply a hybrid of international and municipal law due to the private interests at the heart of the investment dispute (Article 54 ICSID Convention).6 Domestic law matters for applying international law, be it as legal standard incorporated into international law, as part

3

4

5 6

ICSID Secretariat, Possible Improvements of the Framework for ICSID Arbitration, 26 October 2004, paras. 20–23; C. Tams, ‘An appealing option? The debate about an ICSID appellate mechanism’, in G. Kraft and R. Sethe (eds.), Beitra ¨ge zum Transnationalen Wirtschaftsrecht (Halle, 2006). Over the last decades, the number of BITs has exploded. In 2008, more than 2,000 BITs are in force. For a detailed study, see R. Dolzer and M. Stevens, Bilateral Investment Treaties (The Hague: M. Nijhoff, 1995); Reed, Paulsson and Blackaby, Guide, 38–62 provide a good introduction to BITs. J. Paulsson, ‘Arbitration without privity’, ICSID Rev, 10 (1995), 232–56. C. Schreuer, ‘International and domestic law in investment disputes’, ARIEL, 1 (1989), 89.

icsid arbitration on sovereign debt

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of the applicable law before an international tribunal or as facts.7 When international law and domestic law are congruent, the applicable domestic law needs to be applied qua law alongside international law.8 It is important to distinguish the question of applicable law before the tribunal from the scope of its jurisdiction. A tribunal may only have jurisdiction over treaty claims, but its applicable law may include international as well as national law. Or it may have jurisdiction over contract claims, but only be called on to apply international law. Whether the tribunal has jurisdiction over contract claims is only a function of the consent to arbitration. In general, foreign investors may bring both treaty and contractual claims. The two types of claims operate on different, albeit connected, planes. Municipal, not international, law governs whether, where and how sovereign creditors may bring contractual causes of action. BITs bring contractual claims under the protective umbrella of international law, which could give rise to treaty causes of action. BITs offer an additional layer of treaty protection for covered investments.9

B. The advantages of ICSID arbitration Why is ICSID arbitration attractive to bondholders? The Global Committee of Argentine Bondholders (GCAB) has suggested that ICSID represents ‘a more efficient litigation path’ for bondholders.10 ICSID awards could possess a number of advantages over judgments by national courts. First, countries typically pay ICSID awards voluntarily.11 In view of the cases arising out of Argentina’s financial crisis, this statement might require some qualification. There are also isolated examples where the host country has so far refused to pay awards.12 Second, recognition of these awards is not subject to substantive review. They are equivalent to final judgments in all ICSID member states. Article 54 of the ICSID Convention provides: ‘Each Contracting 7 8

9 10 11

12

Commentary to Article 3 ILC Articles on State Responsibility, para. 7. J. Crawford, ‘Treaty and contract in investment arbitration’, Arbitration International, 24 (2008), 352. Ibid., 374. Memorandum from Owen Pell to the GCAB, 15 February 2005. So far, every ICSID award has been paid: ‘At ICSID, there’s never been a case in which a sovereign has failed to pay an award’ (C. Kolker, ‘When nations go bust’, American Lawyer, November 2003, 90, 92.) E.g. Hundekutter v Zimbabwe.

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State shall recognize an award rendered pursuant to this Convention as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court in that State.’ Third, ICSID awards could increase the chances at the enforcement stage. ICSID tribunals might nonetheless also run into the barrier of immunity from execution. Article 55 ICSID Convention provides: ‘Nothing in Article 54 shall be construed as derogating from the law in force in any Contracting State relating to immunity of that State or of any foreign State from execution.’ Fourth, even if none of these advantages obtain, a favourable award could be a valuable bargaining chip for bondholders.

C. ICSID jurisdiction over sovereign debt Article 25 of the Convention vests jurisdiction ratione materiae in ICSID tribunals for ‘any legal dispute arising directly out of an investment’. It does not define the term ‘investment’ further. The absence of a definition in the Convention has always been fertile territory for argument. Debt and financial instruments in particular are at the centre of this controversy. Do financial instruments governed by a domestic law other than the law of the issuer and traded in international capital markets fall under ICSID’s jurisdiction? Prior to the proliferation of BITs, when the investment contract itself gave consent to ICSID arbitration, there was little room for doubt whether a particular transaction constituted an ‘investment’. In the early days of ICSID, the view was widespread that, by consenting to ICSID arbitration in specific investment contracts, the parties implicitly concurred that the object of the dispute was indeed an ‘investment’ under Article 25. However, the rise of BITs placed consent at one remove from the alleged investment (‘arbitration without privity’). It is a truism to note that the Convention does not define the notion of investment. There is a reason for the presence of the word investment in Article 25. The inclusion of the term investment in Article 25 implies that ICSID subject matter jurisdiction is limited. The term investment has a distinct meaning, which can be derived from the ordinary meaning of investment, preparatory works, subsequent practice, arbitral awards and doctrine. The tribunal’s jurisdiction cannot be engaged whenever the parties so desire. ICSID jurisdiction has ‘outer limits’.


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The relationship between Article 25 and BIT consent From BIT coverage, it does not follow that sovereign bonds also qualify as ‘investment’ under Article 25. BITs’ autonomous bilateral definition of investment does not determine the scope of the multilateral Article 25. Many commentators mistakenly translate the definitional lacuna into a very elastic notion of investment. The failure to reach consensus cannot be used to adopt a broad notion by default. Reading away Article 25’s investment requirement in this manner is at odds with commonly accepted principles of interpretation. Giving unique weight to BIT consent deprives Article 25 of its core purpose. Prosper Weil, dissenting in Tokios Tokele´s, lays out the philosophical case for separating consent from the requirements of Article 25: ‘the silence of the Convention . . . does not leave the matter to the discretion of the parties’.13 In that case, a central question was whether jurisdiction under Article 25 existed for a dispute between the Ukraine and a Ukrainian national. The Joy Mining tribunal also cautions against reading a limitless notion of investment into the Convention’s silence: That the Convention has not defined the term investment does not mean, however, that anything consented to by the parties might qualify as an investment under the Convention. The Convention itself, in resorting to the concept of investment in connection with jurisdiction, establishes a framework to this effect: jurisdiction cannot be based on something different or entirely unrelated . . . there is a limit to the freedom with which the parties may define an investment if they wish to engage the jurisdiction of ICSID tribunals . . . Otherwise Article 25 and its reliance on the concept of investment, even if not specifically defined, would be turned into a meaningless provision.14

As the preparatory works confirm, the ICSID Convention uses the term investment in a limiting fashion. An included term must be presumed to have an effect on treaty interpretation. According to the annulment committee in Mitchell v DRC, ‘the ICSID Convention may only be applied to the type of investment that the multilateral ICSID Convention envisaged.’15

13

14

Tokios v Ukraine (Jurisdiction), especially paras. 28–30 of Prosper Weil’s dissent. See M. Burgstaller, ‘Nationality of corporate investors and international claims against the investor’s own state’, JWI, 7 (2006), 857–82. 15 Joy Mining v Egypt, para. 49. Mitchell v DRC (Annulment), para. 25.

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The alternative view gives primacy to the BIT definition of investment, and denies that Article 25 contains a substantive investment requirement. Aaron Broches, a former general counsel of the World Bank and spiritus rector of the Convention, maintained ‘that the requirement that the dispute must have arisen out of an “investment” may be merged into the requirement of consent to jurisdiction’.16 In this view, consent, in a BIT or otherwise, is a sufficient condition for ICSID subject matter jurisdiction. The annulment committee in Malaysian Historical Salvors strongly disagreed with the sole arbitrator’s view that equal weight ought to be accorded to Article 25, when it explained the rationale for why absolute primacy ought to be accorded to the BIT’s definition of investment in the following terms: It is those bilateral and multilateral treaties which today are the engine of ICSID’s effective jurisdiction. To ignore or depreciate the importance of the jurisdiction they bestow upon ICSID, and rather embroider upon questionable interpretations of the term ‘investment’ as found in Article 25 (1) of the Convention, risks crippling the institution.17

The ad hoc committee in Malaysian Historical Salvors, in annulling the sole arbitrator’s award for the ‘gross error’ of not independently evaluating the BIT, broadly approved the Biwater Gauff ’s flexible approach to the characteristics of an investment.18 This conclusion is open to serious doubt. Even under a somewhat more restrictive definition of investment than the one taken by the committee, a substantial number and broad range of investment cases is still going to fall under the Centre’s jurisdiction. Second, it is in tension with state consent to arbitration. Under the alternative approach of giving unique weight to BIT consent, the ICSID Convention would be deprived of its multilateral character. ICSID’s enforcement machinery could be engaged based exclusively on a bilateral definition of investment. To avoid rendering Article 25 meaningless, the first and second steps in evaluating ICSID subject matter jurisdiction cannot be merged. Parties do not enjoy unlimited flexibility in engaging ICSID’s jurisdiction. The investment requirement in Article 25 is distinct from consent in the BIT. Parties to a BIT cannot define the multilateral meaning of 16

17

A. Broches, ‘The Convention on the Settlement of Investment Disputes: some observations on jurisdiction’, CJTL, 5 (1966), 261–80, 268. 18 Malaysian Historical Salvors (Annulment), para. 73. Ibid., para. 79.


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‘investment’ in the Convention. Access to ICSID dispute settlement cases is conditioned on Article 25’s ‘outer limits’.19 In all cases, the transaction needs to fall within Article 25’s ‘objective core’. Conversely, BIT consent could be narrower than Article 25, which covers a broad set of transactions. In this vein, the SGS v Philippines tribunal explains that the ‘jurisdiction of the Center is determined jointly by the BIT and the ICSID Convention’.20 Since this conceptual decomposition is relevant only on the margin of ICSID subject matter jurisdiction, most ICSID tribunals in their decisions on jurisdiction tend to gloss over these two steps. Yet in principle, a double review for ICSID subject matter jurisdiction is needed.21 Under the double test, a cross-border transaction might amount to an investment under the BIT, yet nonetheless be outside ICSID jurisdiction because the transaction fails to satisfy Article 25. Conceptually, ICSID subject matter jurisdiction is evaluated in a two-step test: first, whether the dispute arises out of an ‘investment’ according to Article 25 of the Convention, as opposed to an ordinary commercial transaction; second, whether the dispute relates to an investment as defined in the BIT. There is strong authority for a two-step evaluation of jurisdiction. In the words of Antonio Parra, ICSID jurisdiction requires a ‘double review of the criteria for coverage of the parties and the dispute, first from the viewpoint of the ICSID Convention, and then from the viewpoint of the investment treaty’.22 The requirement of an investment in Article 25 may not automatically be merged into consent to jurisdiction. Aaron Broches, who advocated merging the Article 25 and BIT requirement for an investment, recognised that the absence of a definition of ‘investment’ does not translate into unlimited jurisdiction: ‘The fundamental condition is consent. But consent is not enough. The Centre is an institution of limited jurisdiction, limited . . . by the nature of the dispute.’23

19

20 21

22 23

A. Broches, ‘The Convention on the Settlement of Investment Disputes between States and Nationals of Other States’, Recueil des cours, 132(8) (1972), 330–410, 330 uses this term; Globex v Ukraine (Award), para. 55. SGS v Philippines (Jurisdiction), para. 154. Schreuer, Commentary I, Article 25, paras. 80 and 89; Joy Mining v Egypt, paras. 43 and 48; Malaysian Historical Salvors v Malaysia (Merits), paras. 43, 54–55 (the ‘double-barrelled test’ for jurisdiction), contra Malaysian Historical Salvors v Malaysia (Annulment). A. Parra, ‘The institutions of ICSID arbitration proceedings’ (2003) 20 News from ICSID 13. Broches, ‘Convention on the Settlement of Investment Disputes’, 351–52.

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Following this line of reasoning, the annulment committee in Mitchell v DRC explained that ‘the special and privileged arrangements established by the Washington Convention can be applied only to the type of investment which the Contracting States to that Convention envisaged’.24 By virtue of being a jurisdictional provision in a multilateral agreement, Article 25 is said to enjoy ‘supremacy over an agreement between the parties or a BIT’.25 As the next section shows, ICSID case law fails to reveal a strong basis for ICSID jurisdiction over sovereign debt.

Divergent notions of ‘investment’ Are sovereign bonds ‘investments’ under Article 25 of the Convention? During negotiations, various attempts at defining that term failed. No consensus was reached. This is the primary reason why the Convention is silent on the definition of ‘investment’. Delaume had counselled against including a definition in the Convention, as it would inevitably lead to ‘jurisdictional wrangles’.26 A textual interpretation of the ICSID Convention alone fails to reveal whether debt instruments and sovereign bonds fall under the scope of Article 25.27 The Report of the Executive Directors on the Convention justifies this definitional lacuna as follows: ‘No attempt was made to define the term “investment” given the essential requirement of consent by the parties.’28 Schreuer, in discussing the legislative history of the Convention, highlights that the statement that no attempt to define investment was made is historically incorrect: ‘There were a number of attempts but they all failed.’29 In ordinary usage, ‘investment’ has a variety of meanings. The Oxford English Dictionary defines ‘investment’ as ‘conversion of money or circulating capital into some species of property from which an income or profit is expected to be derived in the ordinary course of trade or business’.30 The ordinary meaning of the term has to be understood in the context of the economic and social development of the host state. The notion of investment as understood in capital markets differs markedly from the 24 26

27 29

25 Mitchell v DRC (Annulment), para. 31. Ibid., para. 25. Report on the Settlement of Investment Disputes between States and Nationals of Other States, Doc ICSID/2 1, ICSID Rep, 23 (1993), para. 26; ICSID History, vol. 2, 22, 59. 28 Schreuer, Commentary I, 124. Ibid., para. 26. 30 Schreuer, Commentary I, 122–25. Oxford English Dictionary (2nd edn, 1989).


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foreign investment context. In financial markets, the purchase of all financial assets is casually referred to as an investment – Krugerrands, stacks of cotton or steel, emissions permits, paintings, violins, oil hedges and credit default swaps. The meaning of investment as employed in financial markets cannot simply be extrapolated. In economics, investment is a component of GDP and stands for gross capital formation. This definition excludes purchases of financial instruments by households. The meaning of investment in international law is also blurry.31 Divergent BIT definitions further illustrate the absence of a generally accepted meaning. Notwithstanding all this, the meaning of investment under the multilateral ICSID Convention cannot simply be inferred from individual BITs or even BITs in aggregate, unless they establish a customary meaning of the term ‘investment’. In isolation, a historical interpretation of the Washington Convention also yields no clear result. During negotiations, delegates offered varying views on the inclusion of bonds and loans. Burundi underscored that money lent by a foreign company to a state could not be regarded as an investment.32 Austria submitted that ‘public loans or bonds should not be included’.33 The Australian delegate, by contrast, highlighted that the draft convention seemed to include not only cases where the investor acquired ‘tangible assets in the host country’ but also ‘the borrowing of cash . . . from foreign private investors’.34 A first preliminary question is whether it is sufficient for sovereign bonds to qualify as an investment on issuance. A second preliminary question is whether, in an arbitration by several bondholders, each creditor needs to be analysed separately for jurisdictional purposes, or whether large numbers of claimants must be lumped together in a collective claim for this purpose (‘a mass claim’ or ‘class action’ by bondholders). This issue is of particular relevance since many governments today issue dematerialised global bonds. Such a bond consists of a single debt instrument issued to a financial intermediary (depository), which records bondholder interests in a book-entry system. Individual holders purchase security interests from a financial institution or broker-dealer,

31

32

M. Sornarajah, The International Law on Foreign Investment (Cambridge University Press, 2010), 9–18 and 304ff surveys the evolution of and the disagreements on the term investment in international law. 33 34 ICSID History, vol. 2, 261. Ibid., 709. Ibid., 668.

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and become beneficial owners through book-entry on the intermediary’s records, rather than receiving physical securities. Article 25 of the ICSID Convention appears to indicate that the substantive requirement of an ‘investment’ is separable from the person requesting arbitration. A separate question is that of standing before ICSID. So far, no ICSID award has clarified whether only ‘investors’ enjoy standing. Under the Convention, the term ‘investor’ has no specific meaning. Article 25 contains only a reference to ‘national of a Contracting State’. BITs, by contrast, often limit consent to ‘investors’. A number of awards use the term ‘investor’ loosely.35 Any party to ‘a dispute arising directly out of ’ another investment could then conceivably request arbitration. Provided the original bond issue as a whole qualified as an investment, a bondholder could bring a claim even if the secondary market purchase itself did not amount to investment. Fedax appears to lean in the direction that separate qualification of secondary market transactions as ‘investment’ is not necessary. The correct view is that the transaction conferring ownership interest to the individual bondholder must be an ‘investment’ because this is the only transaction to which that bondholder is a party and because the secondary market purchaser may not succeed to all rights of the original holder of the bond. Several ICSID cases reach the conclusion that the link between the investment and the person requesting arbitration is conceptually distinct from whether an entity several steps removed in the chain of corporate ownership from the entity with legal title to the investment enjoys standing. Impregilo v Pakistan, for instance, affirmed the holding company’s standing when a wholly-owned subsidiary signed the investment contract.36 Siemens v Argentina reached the conclusion that ‘the [Washington Convention] does not require that there be no interposed companies between the investment and the ultimate owner of the company’.37 Given the textual and historical ambiguity on the inclusion of financial instruments under Article 25 of the ICSID Convention, it is useful to look at how ICSID tribunals have dealt with debt instruments so far. Existing case law generally affirms that financial instruments amount to investments.

35 36

Cf. CMS v Argentina and ADC v Hungary (Merits), para. 305. 37 Impregilo v Pakistan, paras. 164, 184. Siemens v Argentina, para. 137.


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Sovereign debt as ‘investments’ In Fedax v Venezuela, the tribunal regarded promissory notes issued by Venezuela and assigned by another company to Fedax as an ‘investment’: ‘Since promissory notes are evidence of a loan and a rather typical financial and credit instrument, there is nothing to prevent their purchase from qualifying as an investment under the ICSID Convention in the circumstances of a particular case such as this.’38 The tribunal explained that ‘promissory notes are not like “volatile capital”; they satisfy the basic features of an investment – that is, a certain duration, a certain regularity for profit and return, assumption of risk, and a significance for the host state’s development’.39 A turning point in the jurisdictional stage was that the promissory notes contributed substantially to Venezuela’s treasury. The Fedax tribunal reasoned that: The promissory notes were issued by the Republic of Venezuela under the terms of the Law on Public Credit (the Law), which specifically governs public credit operations aimed at raising funds and resources to undertake productive works, attend to the needs of national interest and cover transitory needs of the treasury. It is quite apparent that the transactions involved in this case are not ordinary commercial transactions and indeed involve a fundamental public interest.40

The analysis of the Fedax tribunal stopped at this critical juncture. The tribunal overlooks the distinction that economic transactions may well ‘involve a fundamental public interest’ yet fail to satisfy Article 25’s characteristics for an ‘investment’. The mere presence of a ‘fundamental public interest’ does not transform a commercial transaction into an ‘investment’. Importing such a public interest criterion of overarching scope into the qualification of ‘investment’ lacks a sound basis in the ICSID Convention. Almost every legitimate governmental transaction satisfies Fedax’s erroneous public interest test. Fedax transforms ordinary commercial transactions nearly into a null set. Most, if not all, financial transactions would amount to an ‘investment’. CSOB v Slovakia concerned a financing mechanism located outside the host country’s territory. A consolidation agreement between the bank CSOB and the Czech and Slovak Ministries of Finance provided for the 38 39 40

Fedax v Venezuela, para. 29. These are Schreuer’s typical requirements of jurisdiction turned normative. Fedax v Venezuela, para. 42.

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assignment of certain non-receivables to a specially constituted Slovak collection company to be financed by a loan.41 Slovakia undertook to fill the collection company’s losses, so that the loan to CSOB could be repaid. The Consolidation Agreement referred to a projected BIT (though subsequent loan agreements did not include such a clause), which the tribunal accepted as incorporating its ICSID clause.42 The CSOB tribunal also noted that the term ‘directly’ in Article 25(1) should not be interpreted narrowly. The loan was held to constitute an ‘investment’ even though the claim was based on an obligation, which, standing alone, did not qualify as an investment: ‘the tribunal considers that the broad meaning which must be given to the notion of investment under Article 25(1) of the Convention is opposed to the conclusion that a transaction is not an investment merely because, as a matter of law, it is a loan. This is so, if only because under certain circumstances a loan may contribute substantially to a State’s economic development.’43 The tribunal also explained that it was clear the loan in question ‘did not cause any funds to be moved or transferred from CSOB [to] the territory of the Slovak Republic’.44 It noted that there were no outlays of resources or expenditures in the Slovak Republic.45 The consolidation agreement’s objective, which consisted of multiple elements and of which the loan facility ‘was . . . a mere instrument’,46 was to privatise a large financial institution in a transition economy. The integrated whole of the privatisation project was critical for the tribunal affirming jurisdiction.47 The loan could not be dissociated from the larger transaction. The loan supported a complex series of transactions which, taken together, amounted to an investment in Slovak territory. In a supplementary decision on jurisdiction, the tribunal held that it lacked jurisdiction in relation to the loan. It noted that jurisdiction did not automatically exist with regard to each agreement concluded to implement the investment operation.48 Investments are often composed of multiple transactions forming a whole. Single transactions relating to the investment often do not qualify as investments themselves.49 Freestanding transactions may be 41 42 43 44 48 49

CSOB v Slovakia ( Jurisdiction). Ibid., para. 390; Schreuer, Commentary II, paras. 562–63. CSOB v Slovakia ( Jurisdiction), para. 76. 45 46 47 Ibid., para. 78. Ibid., para. 79. Ibid., para. 81. Ibid., para. 82. Schreuer, Commentary II, para. 563. SOABI v Senegal, para. 4.50 (the construction of a building paid for by the client no investment, in contrast to the larger series of transactions in aggregate).


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ordinary commercial transactions beyond ICSID jurisdiction. Consider the holding of the UNCITRAL tribunal in Mytilineos v Serbia & Montenegro, which found that various transactions taken together constituted an investment under the BIT, but that certain sales, loans and services transactions, by themselves, were ordinary commercial transactions. In aggregate, these transactions qualified as an investment because they not only provided for the sales, services and loans transactions between two commercial partners but they also provided for the establishment of a longterm business relationship which included the provision of credit, spare parts and machinery to the local partner of Mytilineos in Serbia and Montenegro, RTB-BOR, for the purpose of modernizing the latter’s production facility. The planned modernization would have entailed a significant contribution to Serbia and Montenegro’s development. During the intended seven-year duration of all of the Agreements Claimant expected various returns and profits. This engagement which was made with a view to eventual equity participation after privatization was substantial in monetary terms and also not without risks.50

Implicit in the Mytilineos test for investment is that a single bond issuance or loan would not amount to an investment. Another indicator of the presence of an investment is how frequently such transactions occur. The Joy Mining tribunal for example considered that a bank guarantee was in the ordinary course of business because it was frequently concluded. The tribunal noted that the terms of the guarantee reflected ‘entirely normal commercial terms’. It found no reference to investment anywhere and that ‘production and supply of the kind of equipment involved in this case is a normal activity of the Company, not having required a particular development of production that could be assimilated to an investment’.51 The sale of equipment for the mining of phosphate to Egypt was an ordinary commercial transaction. Similarly, a credit facility associated with that ordinary commercial transaction did not constitute an investment.52 Moreover, claims to payments resulting from outlays of money in performing a trading contract are manifestly no investment. In CDC v Seychelles, the Seychelles had guaranteed loans to a public utility corporation. The case was not based on a BIT but on a specific

50 51

Mytilineos v Serbia & Montenegro ( Jurisdiction), paras. 124–25. 52 Joy Mining v Egypt (Jurisdiction). Ibid.; Globex v Ukraine (Award).

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arbitration agreement. The Seychelles accepted that the loan and the guarantee constituted an investment under Article 25.53 Following Russia’s default in 1998, bondholders commenced arbitration seeking the full principal and interest on their debt, after Russia’s global exchange offer provided for payment of less than fifty per cent of their claims. Foreign institutional holders of defaulted Russian domestic short-term debt (GKOs) formed a special subcommittee to investigate their options for recovering on the GKOs. Nomura chaired the subcommittee. Creditors differed on the best strategy to pursue. Ian Brownlie drafted a legal opinion on sovereign debt and the UK–Russia bilateral investment treaty. The case was settled.54 Booker v Guyana is another example of an arbitration initiated by a nonparticipating creditor.55 Booker brought legal action on promissory notes issued in exchange for the nationalisation of Booker’s holdings in the Guyana Sugar Corporation in 1976. Guyana had defaulted on the notes in 1989, after having serviced them for more than a decade. The country attempted several times to settle the debt under the Paris Club. Booker argued that its nationalisation debt was covered neither by the Paris Club nor the Heavily Indebted Poor Countries Initiative (HIPC). The case was settled in 2002 prior to a decision on jurisdiction. In ADC v Hungary, one issue concerned the assignment of a promissory note to an affiliate company. The affiliate ceased to receive payment under the note due to the contested Hungarian governmental measure. The tribunal implicitly accepted that the promissory note formed part of the relevant ‘investment’ under the BIT.56 This award could hence be used in support of the view that promissory notes that are part of a larger transaction amount to an investment. The OKO v Estonia case concerns a claim of three banks arising from the bankruptcy proceeding of state-owned fish processing company Ookean.57 In 1989, the three banks gave a loan to Esva, a Soviet–Finnish joint venture. Valio and Estrybprom had guaranteed that loan. Two years later, Esva defaulted on the loan and the banks turned to the guarantors, without success, since the Russian Estrybprom was also insolvent. 53 54

55

56

CDC v Seychelles ( Jurisdiction), paras. 6, 8, 18. See T. Wa ¨lde, ‘The Serbian Loans Case: a precedent for investment treaty protection of foreign debt?’, in T. Weiler (ed.), International Investment Law and Arbitration (London: Cameron, 2005), 402, n. 44. Booker v Guyana. Cf. M. Saxegaard, ‘Creditor participation in the HIPC debt relief initiatives: the case of Guyana’ (2002) 32 Georgia JICL 725–31. 57 ADC v Hungary (Award), paras. 308ff. OKO Pankki Oyj v Estonia (Merits).


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After the assets of Estrybprom passed to Ookean in 1992, a demand for payment was submitted to Ookean, which went bankrupt in 1995. The bank’s claim was disputed in Estonian courts and excluded from Ookean’s bankruptcy proceedings in 2001. In 2004, the banks requested ICSID arbitration, arguing that the loan amounted to an ‘investment’. I&I Beheer concerned investment claims brought by a Dutch company based on international promissory notes issued by Bandagro, a stateowned Venezuelan agricultural development bank.58 In 1981, the bank issued a series of coupon bearer promissory notes with a ten-year maturity. The note stated that: ‘The terms and condition of this Promisssory Note will be governed by and construed in accordance with the laws of Switzerland and additional thereto by the regulations of the International Chamber of Commerce in Paris and the United States Council of the International Chamber of Commerce Brochure “322” last revised edition.’ The Venezuelan Ministry of Finance guaranteed the notes.59 The Attorney General of Venezuela issued an opinion in October 2003 that the notes were valid. Further investigations led to the conclusion that the notes were forgeries, prompting the Attorney General to revoke the first opinion. Although the issuing bank had since been dissolved, I&I Beheer relied on the sovereign guarantee. Venezuela argued that the notes were forged and designed to defraud the government. The case was discontinued under Rule 44 of the ICSID Rules of Arbitration at the request of a party. In Sempra v Argentina, the Tribunal explained that loans as part of an overall financing arrangement for an investment amounted to an investment: ‘loans are generally to be considered a protected investment’.60 In Renta 4 v Russian Federation, American depository receipts (ADRs) in the Russian company Yukos were deemed to constitute investments irrespective of their legal ownership being vested in a depository and Russia’s lack of prescriptive jurisdiction over the ADRs. ADR holders remained owners in economic terms. The tribunal said the fact that ‘formal share ownership may be recorded as that of the depository is of no moment . . . It would be astonishing to think that a BIT excluded such familiar vehicles of capital mobilization.’61

58 59 60 61

I&I Beheer v Venezuela; 27 American Lawyer No. 12, 1 December 2005. See Skype v Venzuela (2009), for a parallel litigation in US courts. Sempra v Argentina (Award) paras. 214–16. Renta 4 v Russian Federation, paras. 137, 141, 143.

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Which generalisations are possible from this case law? In general, only a few ICSID tribunals have declined jurisdiction for want of the ‘investment’ requirement. ‘No jurisdiction’ for lack of an investment is a rare occurrence in ICSID arbitration. In 1985, the ICSID Secretariat declined registration of a claim arising out of a contract for the sale of goods.62 In Joy Mining, for example, the tribunal declined to qualify a bank guarantee tied to a contract for the provision of mining equipment as ‘investment’.63 In Mihaly v Sri Lanka, the tribunal found that preparatory expenses in the absence of a binding investment contract did not amount to an investment.64 The ad hoc committee’s decision in Mitchell v DRC for annulment was the first to set aside an ICSID award for, among other reasons, want of an investment.65 The Historical Salvors v Malaysia award also concluded that resources spent for a salvage operation for a shipwreck containing a large amount of Chinese porcelain in Malaysian territorial waters constituted an investment.66 However, the ad hoc committee for annulment annulled the award on the grounds that the tribunal manifestly exceeded its powers by failing to exercise its jurisdiction.67 It held the ‘failure of the Sole Arbitrator even to consider, let alone apply, the definition of investment as it is contained in the Agreement [the BIT] to be a gross error that gave rise to a manifest failure to exercise jurisdiction’.68 At the same time, it recognised that several prior awards ‘lend a considerable measure of support to his approach’.69 So far, ICSID tribunals have liberally accepted jurisdiction over debt instruments, despite Article 25’s ambiguity. Yet Fedax and CSOB should not lead to the premature conclusion that ICSID indeed has jurisdiction over debt instruments. Both cases mistakenly ascribe primary importance to the purpose of the transaction. Under Article 25, ICSID tribunals are bound to analyse the character of the transaction by reference to the economic characteristics of investments. Moreover, sovereign bonds issued internationally may readily be distinguished from the debt instruments at issue in Fedax and CSOB. 62

63 64 66 67 68

Asian Express v Greater Colombo Economic Commission, quoted in I. Shihata and A. Parra, ‘The experience of the International Centre for Settlement of Investment Disputes’, ICSID Rev, 14 (1999), 299, 308. Joy Mining v Egypt. See also Mihaly v Sri Lanka ( Jurisdiction). 65 Mihaly v Sri Lanka ( Jurisdiction). Mitchell v DRC. Malaysian Historical Salvors v Malaysia (Merits), paras. 107–46. Malaysian Historical Salvors v Malaysia (Annulment). 69 Ibid., para. 74. Ibid., para. 75.


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Fedax and CSOB as precedents for ICSID arbitration on sovereign debt Fedax is no precedent for ICSID arbitration on sovereign debt instruments governed by a private foreign law. This caveat could be implicit in Fedax, since the tribunal noted that promissory notes would qualify as ‘investment’ but only in ‘given circumstances’. Sovereign debt instruments are commercial transactions, governed almost invariably by the municipal law of a financial centre and its courts, and waive sovereign immunity. The character of the transaction does not change simply because enforcement of municipal judgments against a state might prove more difficult than against a private party. Countries issuing debt on international capital markets place themselves in the position of a party of equal standing vis-a`-vis their creditors. The features of the transaction are commercial. The promissory notes in Fedax are fundamentally distinct from modern sovereign debt. They were issued under Venezuela’s own law and subject to the exclusive jurisdiction of Venezuelan courts. Since Venezuela retained important public powers over such debt instruments, they were not commercial transactions. Even when following Fedax and CSOB in qualifying promissory notes and loans as ‘investments’, care should be taken not to erroneously extrapolate beyond the particular circumstances of these cases. Another distinguishing feature of sovereign bonds relative to loans is their easy tradability on the secondary market and often the intervention of trustees and agents. Bondholders are atomised and anonymous. Bonds are bought on the secondary market without any formality or relation with the debtor government. In the secondary market for sovereign debt, loans and bonds are exchanged between buyer and seller, often at substantial discounts from their face value. These discounts reflect the likelihood of ultimate repayment. The rise of secondary markets since 1980 has provided incentives to buy below par, and pursue litigation for full principal and interest.70 The bondholder’s nationality could change with every transaction.71 For these reasons, sovereign bonds could well follow a different course from loans.

70

71

P. Power, ‘Sovereign debt: the rise of the secondary market and its implications for future restructurings’, Fordham Law Review, 64 (1996), 2701, 2715–19. Fedax v Venezuela, para. 40 (‘the identity of the investor will change with every endorsement’).

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Commentators also lend some support to ICSID jurisdiction over debt instruments. Delaume posited that ‘the characterization of transnational loans as “investments” has not raised difficulty . . . [F]rom the origin of the Convention [it has been assumed] that longer term loans were included in the concept of “investment”.’ Yet this proposition relies on the (rejected) first draft of the Convention, which defined ‘investment’ as ‘any contribution of money or other asset of economic value for an indefinite period or, if the period is defined, for not less than five years’.72 Prior to Fedax, Schreuer argued that ‘[i]t would depend on the particular circumstances of the case whether the extension of loans or the purchase of bonds will qualify as investments’.73 The primary set of transactions beyond the scope of ICSID jurisdiction are ordinary commercial transactions, i.e. the purchase of goods and services in the normal course of business.74 The ICSID Convention does not furnish a definition of the term ‘ordinary commercial transaction’. According to the ordinary meaning of the term, disputes arise out of ordinary commercial transactions if they are between two parties at arm’s length, envisaging no common commercial undertaking and no shared risk, and are not subject to the legal, regulatory and administrative framework of a host state. Disputes concerning ordinary commercial transactions are beyond the outer jurisdictional limits of Article 25. Whereas both Fedax and CSOB depend on special considerations, both cases were wrongly decided for a more fundamental reason. By brushing aside these typical elements, the two tribunals subsumed all portfolio investments under ‘investments’. To what extent portfolio investment generally is included in Article 25’s notion of investment is controversial.75 The definition in Article 25 is not infinitely elastic. Sovereign debt instruments do not display the typical features of an investment. They are ordinary commercial transactions outside ICSID’s objective jurisdictional core, as explained in the next section. 72

73

74

75

G. R. Delaume, ‘ICSID and the transnational financial community’, ICSID Rev, 1 (1986), 237–56, 242 (footnote omitted). C. Schreuer, ‘Commentary on the ICSID Convention: Article 25’, ICSID Rev, 11 (1996), 316, 372. SGS v Pakistan ( Jurisdiction), para. 133, n. 153; El Paso v Argentina ( Jurisdiction), para. 81; Joy Mining v Egypt, para. 52; Globex v Ukraine (Award), para 84. G. Sacerdoti, ‘Bilateral treaties and multilateral instruments in investment protection’, Recueil des cours, 269 (1997) 251–460, 307, ‘portfolio investments . . . are not excluded as a rule’.


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D. The objective core of ICSID jurisdiction ‘Investment’ is a term of art with a multilateral meaning.76 BIT consent alone does not control. A BIT cannot override the jurisdictional envelope set by the multilateral ICSID Convention.77 Article 25 of the Washington Convention purposefully set up a substantive investment requirement in the jurisdictional stage. To regard the ‘investment’ requirement merely as a pro forma jurisdictional requirement on the basis of the Convention’s content-neutral silence would be mistaken. Without state consent, the tribunal lacks the power to adjudicate. Also, the legitimacy of ICSID arbitral awards depends on respecting this adjudicatory mission, in particular since investor–state arbitration often implicates fundamental public interests and substantial claims for compensation. In the words of the Phoenix Action tribunal: BITs, which are bilateral arrangements between two States parties, cannot contradict the definition of the ICSID Convention. In other words, they can confirm the ICSID notion or restrict it, but they cannot expand it in order to have access to ICSID. A definition included in a BIT, being based on a test agreed between two States, cannot set aside the definition of the ICSID Convention, which is a multilateral agreement.78

The Salini award on jurisdiction is widely seen as one of the most significant ICSID awards,79 though criteria for evaluating investments were outlined by the tribunal in Fedax v Venezuela earlier.80 After examining the transaction under the BIT, the tribunal remarked that a double-barrelled test for jurisdiction was required: However, to the extent that the choice of jurisdiction clause was exercised in favour of ICSID, the rights at stake must equally constitute an investment in the

76

77

78 79 80

In this sense, Schreuer, ‘Commentary on Article 25’, 125 (‘the term investment has an objective meaning independent of the parties’ disposition’); Malaysian Historical Salvors (Merits), paras. 42–146. Mitchell v DRC (Annulment), para. 25; Z. Douglas, The International Law of Investment Claims (Cambridge University Press, 2009), 165, para. 344; C. McLachlan, L. Shore and M. Weiniger, International Investment Arbitration: Substantive Principles (Oxford University Press, 2007), 170, para. 6.23; R. Dolzer and C. Schreuer, Principles of International Investment Law (Oxford University Press, 2008), 61–62; Fakes v Turkey (Award), para. 111; Globex v Ukraine (Award), paras. 43–44. Phoenix Action v Czech Republic, para. 96. Malaysian Historical Salvors v Malaysia (Annulment), para. 75 (‘seminal’). Fedax v Venezuela ( Jurisdiction).

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sense of Article 25 of the Washington Agreement. The Arbitration Tribunal took the view that jurisdiction depends on the existence of an investment both in the sense of the bilateral Agreement and of the Convention, following the case-law on this point.81

The tribunal continued: ‘it would be misguided to consider that the demand of a dispute “directly related to an investment” can always be equated with the consent of the contracting parties . . . the case-law of the ICSID and commentators are consistent in regarding the necessity of an investment as an objective condition for the Centre’s jurisdiction to be activated’.82 Based on near unanimous views in favour of an objective approach, the tribunal advocated a global appreciation of the transaction’s character centred on typical elements.

The typical characteristics of investments The alternative view holds that even if the Salini test provides useful guidance, it does not create any jurisdictional requirements.83 The Biwater Gauff tribunal took this view: ‘there is no basis for a rote, or overly strict, application of the five Salini criteria in every case . . . [They] are not fixed or mandatory as a matter of law. They do not appear in the ICSID Convention.’84 Converting the typical characteristics into a ‘fixed and inflexible test’ risks the ‘arbitrary exclusion of certain types of transaction from the scope of the Convention’. The tribunal advocated a ‘more flexible and pragmatic approach’ to take into account the Salini characteristics alongside all the circumstances of the case, including the consent to arbitration.85 Citing the absence of ‘strict, objective definition’, the tribunal explained that arbitral tribunals charged with resolving particular disputes ought not to ‘impose one such definition which would be applicable in all cases and for all purposes’.86 The tribunal explained further:

81 83

84 85

86

82 Salini v Morocco, para. 44. Ibid., para. 52 (citation omitted). Y. Andreeva, ‘Salvaging or sinking the investment? MHS v Malaysia revisited’, Law and Practice of International Courts and Tribunals, 7 (2008), 161–75; D. Krishan, ‘A notion of investment’, in T. Weiler (ed.), Investment Treaty Arbitration and International Law, Vol. I (Huntington, NY: Juris, 2008) (arbitrators lack authority to develop an objective meaning of investment). Biwater Gauff v Tanzania (Award), para. 312. Ibid., para. 316; Malaysian Historical Salvors v Malaysia (Annulment), para. 79 (the approach in Biwauter Gauff is the ‘most persuasive’). Biwater Gauff v Tanzania (Award), para. 313.


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the suggestion that the ‘special and privileged arrangements established by the Washington Convention can be applied only to the type of investment which the Contracting States to that Convention envisaged’ does not, in this Arbitral Tribunal’s view, lead to a fixed or autonomous definition of ‘investment’ which must prevail in all cases, for the ‘type of investment’ which the Contracting States in fact envisaged was an intentionally undefined one, which was susceptible of agreement.87

The tribunal reasoned that a narrow interpretation would lead to the Convention contradicting BITs or other forms of consent to arbitration that purport to grant jurisdiction to the Centre, and go against the grain of a general consensus on a broad notion of investment. In the previous sentence the tribunal had referred to ‘developing consensus in parts of the world’ – a crucial qualifier that has left no trace in the conclusion in the next sentence. It is open to some doubt, however, whether there is indeed an international consensus beyond the superficial level, at least so far as the inclusion of sovereign debt instruments in the notion of investment is concerned. In RSM Production v Grenada, the tribunal noted ‘a broad consensus ... regarding the characteristics establishing the existence of an investment for the purpose of Article 25 of the ICSID Convention’, and restated the Salini criteria as follows: ‘(i) a significant commitment of resources, (ii) an economic risk entailed, (iii) a sufficient duration of the operation, (iv) a regularity of profit and return, and (v) a contribution to the economic and social development of the host state’. While the tribunal recognised ‘the soundness of these general characteristics’, it cautioned that they are not ‘the jurisdictional criteria in Article 25(1) of the ICSID Convention’ or ‘the Article 25(1) test’. Rather, ‘they are but benchmarks or yardsticks to help a tribunal in assessing the existence of an investment’, and they should be used with flexibility.88 The Phoenix Action tribunal considered that the Salini test was incomplete and required elaboration.89 It proposed a modified test with six elements: ‘1 – a contribution in money or other assets, 2 – a certain duration; 3 – an element of risk; 4 – an operation made in order to develop an economic activity in the host State; 5 – assets invested in accordance with the laws of the host State; 6 – assets involved 87 89

88 Ibid., para. 315. RSM v Grenada, paras. 240–41. Phoenix Action v Czech Republic, para. 82.

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bona fide.’90 Its application did not always require ‘extensive scrutiny . . . as they are most often fulfilled on their face, “overlapping” or implicitly contained in others’. It also noted that ‘they have to be analysed with due consideration of all circumstances’.91 In Phoenix Action v Czech Republic, the tribunal also underscored the specialised jurisdiction of ICSID tribunals: ‘There is nothing like a total discretion, even if the definition [of investment] developed by ICSID case law is quite broad and encompassing. There are indeed some basic criteria and parties are not free to decide in BITs that anything – like a sale of goods or a dowry for example – is an investment.’92 The object and purpose of the ICSID Convention is the adjudication of investment disputes specifically. There is no unlimited latitude for parties to submit the whole range of commercial disputes to the Centre.

Typical elements of an investment and sovereign debt An objective core meaning of ‘investment’ is also crucial for legal certainty. For that reason, ICSID tribunals have refined the notion of investment by elaborating typical characteristics of investments. ‘Typical’ in this context means that a large majority of ‘investments’ display these characteristics.93 Typical elements aim to increase legal certainty.94 The Malaysian Historical Salvors award contrasted the ‘typical characteristics’ with the ‘jurisdictional’ approach. Sole arbitrator Hwang questioned whether the two approaches differ significantly in practice and noted that ICSID arbitral tribunals tend to adopt ‘an empirical rather than doctrinaire approach’.95 One caveat applies. The following analysis does not suggest any general limits on how treaties may define ‘investment’. In their bilateral relationship, parties are certainly free to define investment as they see fit. In particular, other arbitral fora would not be barred from hearing disputes concerning transactions outside Article 25’s objective core. Consent to arbitration other than ICSID, such as UNCITRAL, is in no way constrained by Article 25. Such ad hoc tribunals derive their jurisdiction solely from the agreement to arbitrate. ICSID’s Additional Facility also does not require a dispute arising out of an ‘investment’. 90 92

93 94 95

91 Ibid., 114. Ibid., 115. Ibid.; Mitchell v DRC (Annulment), para. 40 (referring to the ‘special arbitration system of ICSID’); Schreuer, Commentary II, 117, para. 122. Cf. Schreuer, Commentary I, Article 25, paras. 10–14. LESI v Algeria (Merits), para. 72. Malaysian Historical Salvors v Malaysia (Merits), paras. 69–72, 78, 105–10.


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Schreuer originally introduced five typical elements of ‘investment’: (1) certain duration, (2) regularity of profit and return, (3) risk sharing, (4) substantial commitment, and (5) significance for the host state’s development.96 His original intent was descriptive, yet many ICSID tribunals subsequently gave these elements normative content. Absence of one typical element is prima facie evidence against qualification as an investment. However, not each typical element is required. Typical elements of an investment are often intertwined and need to be analysed together. Three typical elements are particularly relevant for sovereign debt instruments: (a) significance for the host state’s development, (b) duration, and (c) risk sharing. Sovereign debt is typically repaid with regularly scheduled interest payments and payment of principal on maturity. Regularity of profit and return is likely to be present.97 This uncontentious element is therefore not investigated further. The requirement of a substantial contribution may be relevant for retail bondholders. Beyond these three of Schreuer’s original elements, two additional typical elements, (d) a territorial link with the host country and (e) association with a commercial undertaking, are introduced.

(a) Positive impact on development Schreuer’s first typical element is some positive impact on development.98 The Convention’s preamble contains a reference to ‘the need for international co-operation for economic development and the role of private international investment therein’. The traditional canon of interpretation supports construing an undefined term like ‘investment’ in the light of the preamble, the treaty’s objective and its purpose.99 In Malaysian Historical Salvors v Malaysia, single arbitrator Hwang concluded that the ‘weight of the authorities . . . swings in favour of requiring a significant contribution to be made to the host State’s economy’.100 The tribunal contrasted the lack of significant contribution to the host 96

97

98 99

100

Schreuer, Commentary I, 140, 372; Salini v Morocco; Joy Mining v Egypt, para. 50; LESI v Algeria (Merits), para. 72, dispenses with the elements regulatory of profit and return and positive impact on development and alters the feature of substantial commitment in a key respect. Malaysian Historical Salvors v Malaysia (Merits), para. 108 (regularity of profit and return missing). Schreuer, Commentary I, 372. Cf. the general rules of treaty interpretation in Articles 31 and 32 VCLT; Camuzzi v Argentina ( Jurisdiction), para. 133. Malaysian Historical Salvors v Malaysia (Merits), para. 123 (emphasis in original).

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country’s development in the case of this salvage contract with public infrastructure or banking infrastructure projects.101 The salvage operation lacked the necessary developmental impact. This typical element assumed particular importance because the other typical elements were only ‘superficially satisfied’. The development impact test was thus the ‘litmus test’.102 The ad hoc annulment committee started from the premise of an extremely broad definition of investment: ‘the commitment of money or other assets for the purpose of providing a return’, while recognising that the term was ‘ambiguous or obscure’ in the sense of Article 32 VCLT and justified recourse to preparatory materials.103 The committee first underscored the ‘capacious’ definition of investment in the BIT.104 It took issue with the tribunal’s approach to look first, ‘virtually exclusively’,105 at Article 25 (1) of the ICSID Convention, and objected strongly on the grounds that the arbitrator did not proceed, after having found no investment under Article 25, to a more thorough analysis of the transaction under the BIT. The committee preferred the inverse approach. The committee did not engage in any analysis of the transaction under Article 25, but reaffirmed that the transaction amounted to an investment under the BIT.106 In its eyes, any interpretation of investment that was less expansive than its own would render nugatory the dispute resolution mechanism of ICSID arbitration provided for in the BIT, and do injustice to the intention of the government parties.107 The Convention’s travaux pre´paratoires do not support the approach of ‘outer limits imposed by the sole Arbitrator’.108 The intention of the draftsmen was not to provide for criteria, and even less so conditions for jurisdiction.109 In Victor Pey Casado v Chile, the tribunal found that the preambular language ‘“[c]onsidering the need for international cooperation for economic development” does not amount to a jurisdictional condition 101 103 104 107

108 109

102 Ibid., para. 144. Paras. 130, 135. Malaysian Historical Salvors v Malaysia (Annulment), para. 57. 105 106 Ibid., paras. 59–60. Ibid., para. 61. Ibid. Ibid., para. 62; A. Roberts, ‘Power and persuasion in investment treaty interpretation: the dual role of states’, AJIL, 104 (2010), 179–225 (favouring greater weight to subsequent practice of state parties in investment arbitration). Ibid., para. 69. Schreuer, Commentary I, 140 (‘These features should not necessarily be understood as jurisdictional requirements but merely as typical characteristics of investments under the Convention).


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for investment, but merely reflects the understanding that such “economic development” would be a desirable and natural consequence of investment’.110 CSOB illustrates the prevailing purpose-oriented approach to the positive impact on development criterion: the basic and ultimate goal of the Consolidation Agreement was to ensure a continuing and expanding activity of CSOB in both Republics. This undertaking involved a significant contribution by CSOB to the economic development of the Slovak Republic . . . [Its qualification as an investment within Article 25] is evident from the fact that CSOB’s undertakings include the spending or outlays of resources in the Slovak Republic in response to the need for the development of the Republic’s banking infrastructure.111

The tribunal did not go beyond registering the abstract purpose of the transaction, the spending of resources. Fedax similarly relied heavily on the substantial, albeit abstract, contribution of promissory notes to Venezuela’s treasury for general budgetary purposes.112 The CSOB and Fedax approach to the positive impact criterion is too broad to be either reliable or useful. Under Article 25, potential development and abstract financial flows are not enough. To avoid asymmetrical treatment of host state and investor, the reality of the impact in the host country deserves equal weight. This reflects the twofold objective of the Convention: (i) to increase investor protection in international law, and (ii) to ensure that investments perform an essential economic and social service in developing countries. The reality of the impact of ‘investments’ in the host country warrants a closer look, mirroring the effects doctrine in expropriation. This would reciprocate what Dolzer calls a ‘remarkable tendency to shift the focus of the analysis away from the context and purpose and focus more heavily on the effects on the owner’.113 For practical reasons, an implicit evaluation of the positive impact on development is preferable. If a transaction displays duration, risk sharing and a territorial link, then it is likely to genuinely benefit the host country’s development. However, both Fedax and CSOB gloss over these other typical features uncritically.

110 111 113

Victor Pey Casado v Chile, para. 232. 112 CSOB v Slovakia, para. 88. Fedax v Venezuela, para. 42. R. Dolzer, ‘Indirect expropriations: new developments?’ NYU Environmental Law Journal, 11 (2002), 64–93, 91.

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LESI v Algeria, by dispensing with a separate positive impact criterion, points the way forward. The tribunal reasoned that the development impact was too difficult to establish and already implicit in the elements of substantial contribution, duration and risk sharing.114 The criterion of a contribution to the development of the host state is difficult to operationalise. A showing of development impact would require extensive empirical analysis that will rarely be in the interest of arbitral economy. For that reason, it is preferable to test for a contribution indirectly. This line of analysis incidentally raises the issue whether claims by individual bondholders could fall short of a ‘substantial commitment’ typical of an investment. A related question is whether the contribution by various bondholders in a single arbitration would be considered together. Such a requirement could discriminate between retail and institutional bondholders.

(b)

Long-term transfer of financial resources

A second typical element is the long-term transfer of financial resources. While the ICSID Convention leaves open the question of duration, it is widely recognised that ICSID lacks jurisdiction over short-term financial flows. The Bayindir v Pakistan tribunal called duration a ‘paramount factor which distinguishes investments within the scope of the ICSID Convention and ordinary commercial transactions’.115 The Salini tribunal concerned a transaction of thirty-two months duration.116 The tribunal noted that suggestions for the requisite duration for investments lasted from two to five years. Duration is a strong indicator of investment status, in particular as concerns financial instruments. Long-term commitments of funds accompanying an investment are to be distinguished from facilities established for a short duration. The US–Uruguay and Rwanda–US BITs contain a note that draws a distinction between short-term and long-term capital commitments.117 114

115 116

117

LESI v Algeria, para. 72 (iv); Fakes v Turkey (Award), para. 111 (a separate criterion based solely on the preamble would be excessive). Bayindir v Pakistan ( Jurisdiction), para. 132. Salini v Morocco, para. 54; G. R. Delaume, ‘ICSID and the transnational financial community’, ICSID Rev, 1 (1986) 237, 242 (it ‘has been assumed from the origin of the Convention that loans, or more precisely those of a certain duration as opposed to rapidly concluded commercial financial facilities, were included in the concept of “investment”’), quoted in Fedax v Venezuela ( Jurisdiction), para. 23. Uruguay–USA BIT, 4 November 2005, note 1 to Article 1; Rwanda–USA BIT, 19 February 2008, note 2 to Article 1.


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Yet Fedax takes an overly restrictive view of such ‘volatile capital’ and leaves that term undefined.118 A minimum duration for the investment provides a basis for differentiating transactions according to the length of the investor’s commitment. The holding in Fedax relies on the theory of a continuous credit benefit despite ever-changing holders for ‘eminently negotiable instruments’: ‘although the identity of the investor will change with every endorsement, the investment itself will remain constant’ and to the extent the credit is ‘provided by a foreign holder of the notes, it constitutes a foreign investment’ covered by the Convention and the BIT.119 The Convention’s first draft, albeit inconclusive, offers a starting point (‘for not less than five years’). The Salini tribunal referred to thirty-two months as being of sufficient duration.120 In Bayindi, the tribunal stressed the paramount importance of duration for distinguishing investment from ordinary commercial transactions.121 In Malaysian Historical Salvors v Malaysia, sole arbitrator Hwang found that even though four years were sufficient in quantitative terms, they were not in the qualitative sense, in view of the character of the salvage contract which did not appear to promote the development of the host state.122 Speculative purchases of debt instruments might fail the long-term transfer test. Capital might not be committed long enough to fall under Article 25.123 ‘Speculative’ here does not refer to the riskiness of the bond, but to short financial commitments by individual bondholders. This could apply in particular to purchases on the secondary market. The draftsmen of the ICSID Convention did not conceive of modern secondary markets for sovereign bonds and other debt instruments where purchases can be made in minutes, or seconds. The counter-argument may be advanced that despite the purchase on the secondary market the country did receive the original financing. If this reading is correct, then the sovereign bond issuance as a whole would satisfy the typical feature of a long-term commitment. However, the better view is that purchases on the secondary market themselves need to meet the long-term transfer criterion, because of the required personal link between the purchaser of the bond and the substantive requirements of an investment.

118 120 122 123

119 Fedax v Venezuela, para. 43. Ibid., para. 40. 121 Salini v Morocco, para. 54. Bayindir v Pakistan (Jurisdiction), para. 132. Malaysian Historical Salvors v Malaysia (Merits), para. 110. Joy Mining v Egypt, para. 57.

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Case law provides limited support for declining jurisdiction on the basis of short duration. In Olguıń v Paraguay, Paraguay argued unsuccessfully that ‘speculative financial investments’ were not covered investments.124 The Fedax tribunal rejected Venezuela’s argument that subsequent endorsement of promissory notes took away the character of an ‘investment’. The tribunal noted that ‘the investment will remain constant, while the issuer will enjoy a continuous credit benefit until the time the notes become due’.125 In Saluka v Czech Republic, the Czech Republic alleged that Nomura was no bona fide investor, as its short-term acquisitions of shares served the sole purpose of disposing of IPB’s assets for profit. In dismissing the argument that a speculative motive could affect its jurisdiction, the Saluka tribunal stated: [it] would [not] be correct to interpret Article 1 as excluding from the definition of ‘investor’ those who purchase shares as part of what might be termed bare profitmaking or profit-taking transactions. Most purchases of shares are made with the hope that, in one way or another, the result will in due course be a degree of profit on the transaction . . . Even if it were possible to know an investor’s true motivation in making its investment, nothing in Article 1 makes the investor’s motivation part of the definition of an investment.126

However, even Saluka refers to profit expectations ‘in due course’. Tribunals need not analyse investors’ specific motivations. First, as the Saluka tribunal correctly pointed out, such attempts to elicit motivation would often be futile. Saluka is an arbitration under UNCITRAL rules, where the sole determinant of jurisdiction is the parties’ agreement to arbitrate. Under Article 25 of the Convention, by contrast, the long-term transfer of financial resources is a typical element of investments. Short commitment periods provide a good proxy for volatile capital. When sovereign bonds are held to maturity only for a short duration, the requirement of a long-term transfer of financial resources provides a clear rule for jurisdiction. For instance, a thirty-year government bond held from issuance to maturity will fulfil the long-term transfer criterion. However, this does not in itself imply that sovereign bonds qualify as investment. Claimants would be required to produce documentary proof of continuous bond ownership for a certain period before default. ICSID tribunals ought to establish clear criteria for the 124 126

Olguıń v Paraguay (Merits), para. 65. Saluka v The Czech Republic, para. 174.

125

Fedax v Venezuela, paras. 38 and 40.


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required duration. Short commitments could also be taken into account in the merit stage through the quantification of appropriate compensation.127

(c) Sharing of commercial risk A third typical element is sharing of commercial risk. This feature is linked to the association with a commercial undertaking, examined at subsection (e) below. Classic development projects are characterised by shared risks and uncertainty about their success. The plain meaning of the term investment implies that there are mutual benefits and risks for the investor and the host country – risks that materialise for both parties together. The host state and the investor have a shared interest in a successful outcome. Investments succeed or fail on the merits of the commercial undertaking, of the specific commercial purpose to which capital was committed. Host country and investor share the risk of success and failure. Sovereign bonds, by contrast, are mainly tied to the general macroeconomic condition of the issuing country. They finance the general treasury. No commercial risk is shared among the issuing country and the bondholder. The repayment obligation is fixed, unconditional, and not tied to the success of a commercial undertaking or capital project. The bondholder is repaid, independently of the ultimate uses of the resources provided to the government treasury. Repayment is insulated from commercial risk. Some form of risk is present in every conceivable form of commercial transaction. Bondholders are solely exposed to default risk, due to the uncertain future macroeconomic trajectory of the country. Default risk is an inherent feature of virtually all financial instruments. It is also present in all ordinary commercial transactions. A supplier of office materials to a government is exposed to a similar risk, and this transaction would no doubt qualify as an ordinary commercial transaction, not an investment. Insolvency is another potential risk for the buyer. The fact that default risk has a special quality due to the sovereign character of the issuer does not imply risk sharing typical of investments. Fedax’s interpretation of risk is unduly broad. The tribunal held that ‘the very existence of a dispute as to the payment of the principal 127

See the discussion in ch. 13 below.

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and interest evidences the risk that the holder of the notes has taken’.128 Every unsecured transaction involves the risk of non-performance. The risk cannot exclusively consist in a potential failure to perform a payment obligation – this is simply the risk of non-performance. Nothing bondholders do or refrain from doing is correlated with the risk of the borrowing country defaulting. The relationship is one of debtor and creditor. There is no long-term alignment of interests through an investment contract on the success of a commercial undertaking. For this reason, mere default risk cannot be a meaningful standard for qualifying transactions as ‘investments’. Some sovereign bonds display high default risk; for others the risk of non-performance is low. Yet the mere presence of such risk is not enough. Article 25 contemplates an element of risk sharing. In the words of Joy Mining: ‘Risk there might be indeed, but it is not different from that involved in any commercial contract.’129

(d)

Territorial link with the host country

A significant territorial link is a fourth typical element. There is a distinction between Article 25’s and BITs’ territorial link, another example of the double review for jurisdiction. Whether a BIT requires a territorial link to the host country is separate from whether investments under Article 25 are typically limited to those investments ‘in the territory of the host state’.130 The ICSID Convention itself implies a territorial link requirement in the ordinary meaning of the term ‘investment’ in Article 25. Article 25’s notion of investment is premised on a physical presence in the host country, such as the use of physical capital or the employment of workers in the host country. The regime of the BIT is designed to counterbalance the host state’s regulatory authority over investments in its territory. Furthermore, the object and purpose of the ICSID Convention is to further private investment for purposes that encourage economic development, and is served best by investments in the territory of the host state. The Centre’s close link to the World Bank group lends support to this objective. 128

129 130

Fedax v Venezuela, para. 40. Against such a broad conception of risk, Malaysian Historical Salvors, para. 112 (the ‘quality of the assumed risk’ matters). Joy Mining v Egypt, para. 57. The territorial requirement in BITs is examined at pp. 247–50.


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The Bayview tribunal noted: ‘when an investor of one NAFTA party makes an investment that falls under the laws and the jurisdiction of the authorities of another NAFTA Party, it will be treated as a foreign investor under Chapter Eleven’.131 In contrast to typical foreign investments, sovereign bonds are intangible capital flows. Their situs is more difficult to determine. At the heart of this typical element is whether transactions benefit development without capital, labour, or a physical implantation in the host country’s territory. A principled determination of the situs of the debt, consistent with established precedent in domestic courts, is desirable.132 Elements to be taken into account in the situs determination include the place of marketing and listing, the place of payment, the governing law and the courts with jurisdiction. Douglas suggests that the territorial requirement is satisfied if the host country’s rules of private international law at the time the investment was made located intangible property rights in the host state.133 More generally, Douglas emphasises the need to consider both economic and legal elements in tandem when evaluating the ordinary meaning of the term investment. To consider a winning lottery ticket as an investment ‘does violence to the ordinary meaning of the term “investment”’.134 Renta 4 used an extremely broad construction of the requisite territorial link. The ADRs at issue in the case were issued by US banks and held by a US depository. The tribunal noted that the territorial requirement ‘must be understood by reference to the types of [covered] investments. They are exceedingly broad . . . the contractual relationship here surely qualifies.’135 CSOB also concerned a financing mechanism located outside the host country’s territory. It was clear the loan in question ‘did not cause any funds to be moved or transferred from CSOB [to] the territory of the Slovak Republic’.136 The tribunal noted that there were no outlays of resources or expenditures in the Slovak Republic.137 The purpose of the 131 132

133 134 136

Bayview v Mexico, paras. 101–02. In the context of the nationalisation of debts associated with financial institutions, the situs of a debt is generally held to be the place of the governing law and the creditor: see In re Russian Bank for Foreign Trade [1934] Ch. 720; Socie´te´ Mediterraneénne des Combustibles v Sonatrach, Cass. civ. 1e`re, 20 February 1979. Douglas, Investment Claims, Rule 22, 171. 135 Ibid, para. 344. Renta 4 v Russian Federation, para. 144. 137 CSOB v Slovakia, para. 78. Ibid., para. 79.

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much larger consolidation agreement was to privatise a large financial institution in a transition economy.138 The integrated whole of the privatisation project was critical for the tribunal affirming jurisdiction.139 Even though the loan was made outside Slovakia, it supported a complex series of transactions, which on the whole amounted to an investment in Slovak territory. The tribunal qualified CSOB ‘as an investor and the entire process as an investment in the Slovak Republic within the meaning of the Convention’.140 Sovereign bonds generally do not form part of an overall project or operation in a host country. There is no larger transaction, no contractual obligation other than the provision of funds. No money is lent in support of a project or commercial undertaking. In Sempra v Argentina, loans as part of an overall investment’s financing arrangements taken together were accepted as an investment. The tribunal explained that ‘[u]nder the broad definition of investment contained in the Treaty, loans are generally to be considered a protected investment’.141 A historical interpretation of the Convention provides support to the territorial requirement. The Report of the Executive Directors on the Convention explains that the creation of ICSID was ‘designed to facilitate the settlement of disputes between States and foreign investors’ with a view to ‘stimulating a larger flow of private international capital into those countries which wish to attract it’ and to ‘stimulate a larger flow of private international investment into territories’.142 LESI v Algeria buttresses this position. In reducing Schreuer’s five typical elements of an investment to three, the tribunal adopted a different interpretation of substantial contribution. In its formulation, the first requirement, though not absolute, is that the contracting party made a contribution in the country concerned: ‘que le contractant ait effectue´ un apport dans le pays concerne´’.143 In a territorial requirement so construed, sovereign debt is unlikely to meet the requirement for a territorial link.

138 141

142 143

139 140 Ibid., para. 81. Ibid., para. 82. Ibid., para. 88. Sempra v. Argentina (Award), paras. 214–16; annulled in Sempra v Argentina (Annulment), (ignoring subsequent practice of state parties as to the self-judging character of the non-precluding measures clause in the BIT amounts to a manifest excess of powers). Report of the Executive Directors, paras. 9 and 12 (emphasis added). LESI v Algeria, para. 72 (iv) (emphasis added).


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At least part of the contribution needs to physically occur in the territory of the host country. As the LESI v Algeria tribunal explained: investments are often effected in the country concerned, but this is also not an absolute condition. Nothing prevents investments from being undertaken at least in part from the country where the investor resides, as long as this is done in the framework of a project to be implemented abroad.144

For debt instruments traded on secondary markets, the territorial link is especially tenuous. Suppose Ruritania’s sovereign bonds traded on the secondary market in Zurich changed hands. With secondary market purchases, there is typically not even any flow of financial resources into the issuing country, unless the seller is resident in the issuing country. Secondary market purchases by individual bondholders are likely to lack a territorial link. The absence of this typical element of an investment decreases, in turn, the likelihood that the secondary market transaction will have a positive effect on the debtor country’s development. Taken together, this implies that a secondary market purchase of a sovereign bond is unlikely to qualify as an investment. The debtor state generally receives the proceeds at a single point in time, on issuance of the bonds. Assume that there was a positive impact on development when the bonds are issued. The question is whether past impact on development suffices. Does the original benefit to economic development extend to all subsequent purchasers, or does each bondholder need to contribute individually to economic development? Can the acquirer on the secondary market step into the shoes of the original owners? Compare the case of a secondary market purchase of debt instruments with the acquisition of a power plant that is being built in the host country, where the project is sold on to another investor. In these circumstances, the purchaser is not required to contribute again to economic development. It is enough for an investment to exist if the purchaser succeeds to a bundle of rights that originally contributed to development, provided these benefits to economic development persist to the present. Even if one were to require continuous contribution to economic development, a plausible argument could be made that an efficient secondary market for sovereign debt contributes in no small measure 144

LESI v Algeria, para. 14 (translation by the author).

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to economic development. On this theory, liquidity in the secondary market drives down the government’s overall borrowing costs, and thereby eases the government’s budget constraint. However, this contribution could be too remote to satisfy the typical element of a positive effect on economic development.

(e)

Association with a commercial undertaking

A fifth typical element of an ‘investment’ is the operation of, or a reasonably close association with, a commercial undertaking. This feature is inherent in Article 25’s notion of investment.145 So far, no ICSID tribunal has explicitly recognised this feature. The meaning of investment in international investment case law comprises equity holdings in private- or publicly-owned entities whose main goal is commercial. Corporate bonds, for instance, are issued by such entities. They are associated with a commercial undertaking and would fulfil this typical feature of an investment. Sovereign bonds lack the typical elements of an investment. The US Supreme Court defines ‘investment contract’ under the Securities Act of 1933 as ‘a contract, transaction or scheme whereby a person invests his money in a common enterprise’.146 Applying this definition, the Third Circuit found that in a common enterprise ‘the fortunes of the investor are interwoven with and dependent on the efforts and successes of those seeking the investment or of third parties’, which relates back to the typical element of sharing risk.147 This definition of investment from the domestic context, though not determinative, suggests that a certain commonality of purpose characterises investments. Standardised sovereign debt instruments are unlikely to meet this test. 145

146

C. Schreuer, ‘The concept of expropriation under the ECT and other investment protection treaties’, in C. Ribeiro (ed.), Investment Arbitration and The Energy Charter Treaty (Huntington, NY: Juris Publishing, 2006), 108, 124, mentions the need of a ‘business’ for expropriation; T. Wa ¨lde and A. Kolo, ‘Environmental regulation, investment protection and “regulatory takings” in international law’, ICLQ, 50 (2001), 811–48, 835, speak of ‘a combination of rights in a commercial and corporate setting and under a regulatory regime’ (emphasis added). EPIL (vol. 8, 246) defines investment as ‘direct or indirect participation in the earnings of [an] enterprise’; the IMF’s Balance of Payment Manual on Foreign Investment (1980, para. 408) refers to acquisition of a ‘lasting interest in an enterprise’. In Fedax, Venezuela submitted investment meant ‘the laying out of money or property in business ventures, so that it may produce a revenue or income’ (para. 19). 147 SEC v Howey (1946) (emphasis added). SEC v Unique Financial (1999).


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Sovereign bonds also differ from corporate debt instruments. The issuing entity is the state. Typically, funds raised via sovereign bonds are used for general budgetary purposes. There is no related commercial undertaking. The prospective sovereign bondholder does not participate in the elaboration of specific projects and evaluates the commitment of capital against that background. Neither personnel nor ideas nor production facilities are combined. Rather, bondholders solely look to the country’s creditworthiness. The contrast between shares and sovereign bonds is also instructive. Shares are associated with a commercial undertaking. Yet countries do not issue shares or share-like instruments. A shareholder owns part of the company; a bondholder does not and has no voice in management. On the margin, the owner of even the smallest shareholding does. A corporate bond, after all, is only a claim to some predefined part of corporate earnings. In the case of sovereign bonds, it is a claim on a country’s primary surplus. Given these distinctions, sovereign bonds do not share the fate of shares. There is no association with a commercial undertaking. Sovereign bonds typically serve general budgetary purposes. Such bonds will generally fail to qualify as ‘investment’ for lack of association with a commercial undertaking. ICSID could still have jurisdiction over sovereign bonds associated with a transaction which on its own merits amounts to an ‘investment’. ICSID has jurisdiction as long as the dispute ‘arises directly out of an investment’. In Fedax, the tribunal put it thus: It is apparent that the term ‘directly’ relates in this Article to the ‘dispute’ and not to the ‘investment’. It follows that jurisdiction can exist even in respect of investments that are not direct, so long as the dispute arises directly from such transaction. This interpretation is also consistent with the broad reach that the term ‘investment’ must be given in the light of the negotiating history of the Convention.148

CSOB v Slovakia follows Fedax in this respect, noting that ‘a dispute . . . must be deemed to arise directly out of an investment even when it is based on a transaction which, standing alone, would not qualify as an investment under the Convention, provided that the particular transaction forms an integral part of an overall operation that qualifies as an investment’.149 148

Fedax v Venezuela, para. 24.

149

CSOB v Slovakia, para. 72.

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Bonds issued by public entities tied directly to specific projects, such as railway or power plant construction, come to mind. In the Compagnie Geńe´rale des Eaux case, a mixed commission considered such a bond.150 While the case has no direct bearing on the interpretation of ICSID’s Article 25, it might still possess some persuasive force. The next section looks at the second leg of the double review. BIT investment definitions differ. Some BITs include sovereign bonds in their autonomous definition, others do not. Even if BITs cover sovereign bonds, the transaction nevertheless needs to fall inside the objective core. If unique weight were attached to BIT consent, Article 25’s investment requirement would become an empty shell.

E.

Sovereign debt instruments under BITs

Do BIT definitions cover sovereign bonds? This is the second step in evaluating ICSID jurisdiction. Some BITs cover corporate bonds, yet exclude sovereign bonds. For instance, the Bahrain–US BIT limits investments to bonds and debt interests in a company: ‘Shares, stock and other forms of equity participation, and bonds, debentures, and other forms of debt interests, in a company’.151 The German Model BIT of 2005 covers ‘claims to money which has been used to create an economic value’.152 NAFTA includes debt securities and loans of enterprises. Public issuers, including loans to state enterprises, are explicitly excluded.153 The Canadian Model BIT also excludes debt instruments issued by public entities. The Mexico–India BIT also rules out any ‘debt security, regardless of original maturity, of a Contracting Party or of a State enterprise’.154 Other BITs include sovereign bonds in their coverage. The 2004 US Model BIT covers, among others, ‘bonds, debentures, loans, and other debt instruments’. Such a wide definition is found, for instance, in the Japan– South Korea BIT, which includes ‘every kind of asset, including bonds, debentures, loans, and other forms of debt, as well as rights under contracts’.155 But the question of whether financial instruments are covered remains an open question (and one of considerable import).156 150 151 153

154 156

Compagnie Geńe´rale des Eaux de Caracas (Belgium v Venezuela). 152 Article 1.d.2 Bahrain–US BIT. Article 1(c) German Model BIT 2005. Article 1.d.2 NAFTA; Article 2.2 Colombian Model BIT 2008; Article 1.1(vii)(b) Ghana Model BIT 2008; Article 1 Croatia–Azerbaijan BIT 2007. 155 Article 1 (7) India–Mexico BIT, 21 May 2007. Article 1 (2) South Korea–US BIT. Deutsche Bank v Sri Lanka (oil hedging agreement).


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The Argentina–Italy BIT, which is the instrument of consent in the Argentine bondholder arbitrations before ICSID, defines investment as follows: ‘Investment’ shall mean, in compliance with the legislation of the receiving State and independent of the legal form adopted or of any other legislation of reference, any conferment or asset invested or reinvested by an individual or corporation of one Contracting Party in the territory of the other Contracting Party, in compliance with the laws and regulations of the latter party. In particular, investments include, without limitations: . . . 1.

(c) bonds, private or public financial instruments or any other right to performances or services having economic value, including capitalized revenue . . . 2. (f) any right of an economic nature conferred under any law or agreement157

Article 1 (c) and (f) of the Argentina–Italy BIT is broadly formulated, and covers a sovereign bond. As one commentator has noted: ‘Some investment protection instruments such as the . . . Italy–Argentina BIT expressly include public debt held by nationals of the other party.’158 On the plain text of this, the parties consented to the inclusion of sovereign bonds and other debt instruments. The Argentina–Germany BIT includes in its definition of investment (among others): ‘claims to money used to create economic value or claims to performance which have economic value.’159 By contrast, the Argentina–US BIT covers ‘claim[s] to money or a claim to performance having economic value associated with an investment’.160 Not all claims to money or performance are included in this particular BIT. They need to be associated with an investment in its own right.161 In contrast to the German and Italian BITs with Argentina, the requirement of an association with an investment proper suggests that sovereign bonds, used for general budgetary purposes, are outside the scope of the Argentina–US BIT.162 157 158

159

160 162

Article 1 (1) Italy–Argentina BIT. A. Szodruch, ‘State insolvency: consequences and obligations under investment treaties’, in R. Hofmann (ed.), The International Convention on the Settlement of Investment Disputes: Taking Stock after 40 Years (Baden Baden: Nomos, 2007), 141, 148 (2007) (footnote omitted). Article 1.1.c. Argentina–Germany BIT: ‘los derechos a fondos empleados para crear un ´mico o a prestaciones que tengan un valor econo ´mico’. valor econo 161 Article 1.a.3 Argentina–US BIT. Globex v Ukraine (Award), paras. 50–51. Cf. Article 1.4.h. Morocco–US BIT, limiting coverage to ‘financial or commercial debts, which are associated with an investment’.

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A few writers have also expressed an opinion on the investment character of sovereign debt. Sacerdoti explained that ‘the undertaking to respect contractual obligations found in many recent BITs may be relevant also to equities and debentures issued by a contracting State or by its companies abroad’.163 Aaron Broches maintained that sovereign bonds count as investment: ‘There was no doubt that a foreign bond issue by a country constituted an investment by the foreign investors in that country but it would not necessarily be governed by local law.’164 Douglas notes that the ‘provision of credit by the investor to an entrepreneur or enterprise engaged in commercial activities in the host state qualifies as an investment. The investor acquires rights to a debt, which can be assigned and thus has the features of a right in rem.’165 The limitation of this statement to ‘entrepreneurs or enterprises engaged in commercial activities’, together with his emphasis on the economic characteristics of ‘investments’, indicates that he would regard sovereign debt instruments as falling outside ICSID jurisdiction. A recent innovation in BITs are specific sovereign debt restructuring annexes, which limit the host state’s treatment obligations relative to public debt to national and MFN treatment. These annexes encapsulate the first implicit official recognition that ICSID arbitration could be used by holdout creditors to unravel sovereign debt restructurings approved by a majority of creditors. The Chile–US FTA limits obligations relative to public debt to national and MFN treatment: ‘The rescheduling of the debts of Chile . . . owed to the United States and the rescheduling of its debts owed to creditors in general are [subject only to] article 10.2 [MFN] and 10.3 [national treatment].’166 Similar policy considerations are apparent in the Uruguay–US BIT. It qualifies treatment standards with respect to sovereign debt: ‘No claim that a restructuring of a debt instrument issued by Uruguay breaches an obligation under Articles 5 through 10 [fair and equitable treatment, full protection and security, expropriation] may be submitted to . . . arbitration, if the restructuring is a negotiated restructuring’. ‘Negotiated 163 164

165 166

Sacerdoti, ‘Bilateral treaties’, 307 (emphasis added). Remarks of Chairman A. Broches, Settlement of Investment Disputes Consultative Meeting of Legal Experts, Summary Record of Proceedings (27 April–1 May 1964), in ICSID History, Vol. 2, Part 1 (Docs. 1–43), 458, 514 (1968). Douglas, Investment Claims, para. 381. Chile–US FTA, Annex 10-B. Cf. also Australia–US FTA (Article 11.17.4.c.), Morocco–US FTA (Article 10.27 (c)), CAFTA (Article 10.28 (c)), Peru–Singapore FTA 2008 (Articles 10.1 and 10.18) and Peru–China FTA 2009 (Annex 8).


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restructuring’ is defined as restructuring to which a specified majority (usually two-thirds) of creditors have consented.167

Territorial requirements in BITs Some BITs require a territorial link over and above Article 25.168 In such cases, a double review is necessary. Sacerdoti questioned whether sovereign bonds would be a covered investment under the typical BIT. Since issuance of sovereign bonds would not meet the requirement of being made in a host country’s territory, protection would not extend to sovereign bonds, ratione loci.169 Yet a number of prominent cases interpret the BIT’s territorial requirement liberally. In all three cases, the jurisdictional defence that the BIT required an ‘investment in the territory’ was to no avail. In Fedax, Venezuela duly disputed the tribunal’s jurisdiction on the grounds that Fedax had not made an investment ‘in the territory’ of the contracting parties as prescribed in the BIT. In dismissing this argument, the tribunal stated that: ‘It is a standard feature of many international financial transactions that the funds involved are never physically transferred to the territory of the beneficiary but put at its disposal elsewhere.’170 It may be that the underlying service transaction for which the promissory notes were issued was an important factor in the tribunal’s conclusions. Under Fedax’s broad notion of territoriality, no physical transfer was required, as making funds available to the recipient state sufficed. Fedax’s broad notion of territoriality is problematic. The tribunal replaced the territorial requirement with a much broader ‘utilized by the beneficiary of the credit’. But it is a non sequitur that an investment is a ‘standard feature of many international financial transactions’. Such reasoning is circular, because the tribunal inferred the meaning of ‘investment’ from prominent characteristics of international financial transactions. International financial transactions are not all investments. The proper question is whether it is a standard feature of investments as the terms are being used by Article 25 and the BIT. Rudolf Dolzer took issue with the tribunal’s construction of the territorial element:

167 168 170

US–Uruguay BIT, Annex G. 169 Argentina–Italy BIT. Sacerdoti, ‘Bilateral treaties’, 308. Fedax v Venezuela, para. 41. Cf. also CSOB v Slovakia, para. 88.

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The [Fedax] decision turns, in brief sentences, to all these elements and, without further analysis, affirms their presence in the context of promissory notes intended for international circulation . . . Read in its entirety, therefore, the Fedax decision is not without ambiguity in its construction of the term ‘investment’. The tribunal addressed the broader issues, but did not have to take a clear position on them in view of the facts of the case. Subsequent tribunals did not have occasion significantly to advance the discussion. . . . A third area of uncertainty . . . relates to the territorial dimension of foreign investments . . . Without explaining the rationale for this view in any detail, the Fedax tribunal considered apparently that it is sufficient that the funds made available by the investor are utilized by the host country as the beneficiary of the transaction, so as to finance various governmental needs.171

The tribunal mistakenly premised its holding on the postulated assumption that the BIT’s contracting parties desired to cover all international financial transactions. Instead, the tribunal should have clarified the meaning of ‘investment’ under Article 25 and the BIT first, and only then evaluated whether the specific transaction amounted to an investment. The Fedax promissory notes would almost certainly fail the territorial link required under Article 25.172 In Fedax, there was arguably a remote territorial link. The promissory notes at issue in Fedax were not free-standing. They accompanied an underlying service transaction in Venezuela. Venezuela argued that the transfer of the promissory notes outside of Venezuela deprived them of the character of being part of an investment in Venezuela. It admitted that if, counterfactually, the assignee (Fedax) ‘had been doing business in Venezuela at the time in question and had entered into exactly the same arrangement with the Republic of Venezuela as Industrias Meta´ rgicas Van Dam CA [the assignor]’, then an investment would have lu been present. The tribunal affirmed that the promissory notes were separable and independent from the underlying transaction.173 In the tribunal’s view, the assignee could simply step into the assignor’s shoes and retain that holder’s original status. The endorsement of the promissory notes issued for payment of services in Venezuela to a holder outside Venezuela did not sever the territorial link that existed in relation to the underlying transaction.

171

172

R. Dolzer, ‘The notion of investment in recent practice’, in S. Charnovitz et al. (eds.), Law in the Service of Human Dignity: Essays in Honour of Florentino Feliciano (Cambridge University Press, 2005), 261, 269. 173 See the discussion at section D(d) above. Fedax v Venezuela, para. 40.


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In Fedax, in sharp contrast to the two SGS cases, the holders of promissory notes never expended financial resources in Venezuela for a commercial undertaking, nor did they provide a service whose point of delivery was in the territory of the contracting party. However, the bonds were given qua payment for service provision in Venezuela. If the proceeds of a sovereign bond are deposited or used for transactions outside the issuing country, it is doubtful whether such a transaction could meet a territorial BIT condition. The argument that money is fungible, and that, hence, they could free financial resources in the host country for other uses is to no avail. Such a reading would be at odds with the plain meaning of ‘in the territory’. SGS v Philippines held that pre-shipment inspection services conducted in a port outside the host country did not detract from the qualification as investment, since the focal point of the contract was the delivery of inspection certificates in the Philippines.174 The tribunal also pointed out: ‘In accordance with normal principles of treaty interpretation, investments made outside the territory of the Respondent State, however beneficial to it, would not be covered by the BIT.’175 It indirectly criticised the extremely broad notion of territoriality in Fedax: The Tribunal in the Fedax case gave a very broad definition of territoriality, but the focus of the decision was whether the endorsee of a promissory note issued with respect to an investment had itself made an investment, and whether the dispute over non-payment of the note arose ‘directly’ out of an investment within the meaning of Article 25(1) of the ICSID Convention.176

In Gruslin v Malaysia, the tribunal also emphasised the need for a territorial link, even though the issue was not dispositive because the tribunal declined jurisdiction on another, prior ground. The case concerned Gruslin’s interest in securities listed on the Kuala Lumpur stock exchange, held through a mutual fund based in Luxembourg. The tribunal made it clear that an investment ‘in the territory of Malaysia’ was a prerequisite for an investment to exist under the BIT and under Article 25 ICSID Convention.177 More flexible interpretations of the requirement for a territorial link also emphasise that at least a substantial part of the putative investment must be located in the host state.178 The tribunal in Renta 4 construed the requisite territorial link extremely broadly. The ADRs at issue in the case were issued by US banks and held by a US depository. The tribunal noted that the territorial 174 176 178

175 SGS v Philippines ( Jurisdiction), paras. 57, 99–112. Ibid., para. 99. 177 Ibid., para. 110, n. 41. Gruslin v Malaysia (Award) para. 26.2. LESI v Algeria (Award), para. II.14(i).

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requirement ‘must be understood by reference to the types of [covered] investments. They are exceedingly broad . . . the contractual relationship here surely qualifies.’179 In any event, the mere use of funds by the host country in its territory is insufficient. What matters is whether there is some undertaking within the host country’s territory. If there is no commercial undertaking, sovereign bonds fail the BIT’s territorial requirement.

F. Summary and conclusion The argument developed thus far may be summarised as follows. Article 25’s silence is content-neutral. Typical elements circumscribe the objective core meaning of ‘investment’ which is independent of the BIT.180 This core is the outer perimeter of ICSID jurisdiction. Article 25’s objective core is to be evaluated primarily against the character of the transaction. If, instead, the term ‘investment’ were limitless, then ICSID arbitration could be deployed to the detriment of bondholders of third countries. ICSID awards are equivalent to final judgment in ICSID member countries.181 A purely bilateral exercise of jurisdiction could also have substantial extraterritorial reach. The basis for ICSID jurisdiction over debt instruments in particular is generally weak. In many cases, sovereign debt will fail to display the typical features of an investment. Careful inspection of existing case law lends scant support to ICSID jurisdiction over debt instruments in general and sovereign bonds in particular. This conclusion challenges the conventional wisdom that ICSID jurisdiction on such instruments is straightforward. On jurisdiction, it is doubtful whether sovereign bonds are investments under Article 25 of the ICSID Convention. Article 25’s subject matter jurisdiction depends on an objective jurisdictional core and is conceptually distinct from consent as expressed in the BIT. ICSID case law fails to reveal a strong basis for ICSID jurisdiction over sovereign bonds. This supports the conclusion that modern sovereign bonds are ordinary commercial transactions. 179 180

181

Renta 4 v Russian Federation, para. 144. Malaysian Historical Salvors v Malaysia (Annulment), para. 72 (rejecting the proposition that Article 25 has any objective content or outer limits that cannot be varied by the consent of the parties). Cf. Articles 53–55 of the ICSID Convention.


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Affirming jurisdiction over virtually all financial transactions risks undoing the bargain of the ICSID Convention. ICSID tribunals are tribunals of specialised jurisdiction, premised on state consent. If sovereign debt were to qualify as an investment, then the jurisdictional reach of ICSID becomes extremely broad. A whole range of capital market transactions, ranging from plain vanilla financial instruments such as bonds to derivative products such as hedges and credit default swaps, would likely be covered by ICSID jurisdiction. The likely effect would be to convert ICSID tribunals into commercial courts of general jurisdiction, in lieu of domestic courts called on to adjudicate such disputes by virtue of contractual dispute resolution clauses. The following chapter looks at how domestic jurisdiction and collective action clauses (CACs) interact with ICSID jurisdiction. The incomplete separation of contract and treaty claims implies that ICSID tribunals, with exclusive domestic jurisdiction or CACs, owe deference to municipal law, the governing law of virtually all modern sovereign lending instruments. The typical locus of dispute settlement is in domestic courts rather than before international courts and arbitral tribunals.

11

Overlapping jurisdiction over sovereign debt

The municipal law of an important financial centre almost invariably governs sovereign bonds. Analogously, modern debt instruments are subject to the jurisdiction of the courts in these few select jurisdictions.1 ICSID could enjoy concurrent jurisdiction over contract and treaty claims to the contractually chosen forum. This scenario could lead to jurisdictional conflicts and parallel proceedings between national courts and ICSID tribunals. While current international law has few rules to resolve such conflicts, such jurisdictional overlaps are common in international investment law.2 However, this chapter will argue that as sovereign bonds lack a specific connection to ICSID these jurisdictional conflicts are particularly acute in the debt context. Arbitration under ICSID auspices threatens to upset expectations in the sovereign debt market and dispute resolution in national courts.3 The advent of restrictive sovereign immunity and the widespread use of waivers paved the way for litigation in national courts by sovereign creditors. Since the 1970s, sovereign creditors have exhibited a strong preference for dispute settlement in the national courts of important financial centres, such as London and New York. The perceived advantages of these courts over arbitration include a strong commitment to the sanctity of contract and the resulting legal certainty; a high degree of expertise with financial instruments; adjudication solely on the basis of the applicable contract

1 2

3

The main centres are New York, London, Paris, Frankfurt and Zurich. For a general discussion of such conflicts see V. Lowe, ‘Overlapping jurisdiction in international tribunals’, AuYBIL, 20 (1999), 191. Other reasons why creditors prefer national courts over arbitration are discussed in ch. 3, sections C and D.

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law and the availability of summary judgment. As a result, arbitration on sovereign debt has been extremely rare over the last four decades. As creditors and debtor governments generally commit to dispute settlement in national courts, they expect dispute settlement only in the forum they themselves have chosen. Sovereign debt contracts are concluded as a whole, and the prospect of ICSID arbitration would not have been contemplated when the contract was concluded. In these circumstances, ICSID intervention threatens to unravel the unity of the contractual bargain. The possibility of the investor waiving the right to ICSID arbitration is also examined. The conclusion reached is that in most circumstances exclusive domestic jurisdiction and CACs contained in sovereign debt instruments bar recourse to ICSID arbitration. The following section examines how treaty and contractual causes of action interact with respect to sovereign debt.

A. Contractual versus treaty causes of action How does sovereign debt come within the ambit of international law? International law appears on the scene when bondholders request ICSID arbitration and allege violations of the BIT’s treatment standards. In principle, two non-exclusive routes of relief exist: contract and treaty. The bondholder could pursue contractual claims under the bond concurrent to treaty claims, or could eschew the contractual claim for repayment and allege a violation of international law. Article 25 of the Washington Convention draws no distinction between treaty and contractual claims. ICSID jurisdiction may perfectly well extend to purely contractual disputes, as long as the dispute arises directly out of an ‘investment’.4 That said, contractual and treaty claims operate on separate planes. A sovereign default does not automatically imply a breach of BIT treatment obligations.5 As an exception to this general rule, umbrella clauses, according to one view, elevate all contractual claims to treaty claims. Umbrella clauses contain the host state’s general commitment to honour all 4 5

Schreuer, Commentary I, 127–34. E. Borchard, State Insolvency and Foreign Bondholders: Vol. 1, General Principles (Yale University Press, 1951), 115; F. V. Garcıá-Amador, Second Report on State Responsibility, UN Doc. A/Cn.4/106, YBILC 1957-II, 117. In negotiations for the Multilateral Agreement on Investment, there was also strong support for this proposition: OECD, ‘The Multilateral Agreement on Investment – Commentary’, 22 April 1998, OECD Doc. DAFFE/ MAI(98)8/Rev 1, 23.

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contractual undertakings. A treaty violation goes hand in hand with the contractual breach.6 Accordingly, in the presence of an umbrella clause, a sovereign debt default could, ipso facto, constitute an internationally wrongful act. Another view posits that umbrella clauses leave the proper law of the contract and its dispute settlement provision unchanged;7 to regard umbrella clauses as internationalising investment contracts, transforming contractual claims altogether into treaty claims, is mistaken. The purpose of the umbrella clause is to allow enforcement without internationalisation.8 The breach of umbrella clauses hinges on specific obligations assumed by the state with respect to its creditors. The enactment of a law by a state, whether it is specific or general, is not the entry by the state into an obligation distinct from the law itself. As the Vivendi v Argentina annulment panel held, the term ‘specific requirements concerning the investment [does not] cover general requirements imposed by the law of the host state’.9 ICSID tribunals have struggled to distinguish contractual from treaty causes of action. The delimitation of treaty and contract in investment arbitration is one of the most fertile and contentious areas in this field.10 However, the possibility for treaty and contract claims to coexist is widely acknowledged. In Bayindir v Pakistan, the tribunal explained the principle that contractual and treaty breaches are legally distinct, and exist in isolation despite their common factual root, in the following terms: ‘The Tribunal considers that when an investor has a right under both the contract and the treaty, it has a self-standing right to pursue the remedy accorded by the treaty.’11 6

7 8

9 10

11

C. Schreuer, ‘Travelling the BIT route: of waiting periods, umbrella clauses and forks in the road’, JWI, 5 (2004), 231–56; A. Sinclair, ‘The origins of the umbrella clause in the international law of investment protection’, Arbitration International, 20 (2004), 411–34. Vivendi v Argentina No.1 (Annulment), para. 95 (c). J. Crawford, ‘Treaty and contract in investment arbitration’, Arbitration International, 24 (2008), 351–74, 370. Vivendi v Argentina No.1 (Annulment), para. 95. E. Gaillard, ‘Investment treaty arbitration and jurisdiction over contract claims: the SGS cases considered’, in T. Weiler (ed.), International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law (London: Cameron May, 2005), 325–46; C. Schreuer, ‘Investment treaty arbitration and jurisdiction over contract claims: the Vivendi I Case considered’, ibid., 281–324; Y. Shany, ‘Contract claims vs. treaty claims: mapping conflicts between ICSID decisions on multisourced investment claims’, AJIL, 99 (2005), 835–51; Crawford, ‘Treaty and contract’, 351–74. Bayindir v Pakistan (Jurisdiction), para. 148.


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The first ad hoc annulment committee in Vivendi v Argentina emphasised the distinctiveness of the two types of breaches: ‘whether there has been a breach of the BIT and whether there has been a breach of contract are different questions. Each of these claims will be determined by reference to its own proper or applicable law – in the case of the BIT, by international law; in the case of the [contract], by the proper law of contract.’12 The real controversy is elsewhere. The heart of the issue is the extent to which the applicable domestic law ought to be taken into account in assessing treaty breach. International law cannot simply look at a right or obligation arising in municipal law in clinical isolation from that applicable law. Some awards strictly distinguish the ‘treaty’ and ‘contractual’ spheres. In reality, however, the two often cannot be entirely disentangled, as municipal law is relevant for evaluating whether the state breached its treaty obligations. The Woodruff case calls for an analysis of the ‘fundamental basis of the claim’ whenever treaty and contractual elements are intertwined.13 Even though Woodruff is a non-ICSID award, the ICSID ad hoc annulment committee in Vivendi v Argentina relied on this finding as a persuasive authority.14 The Woodruff test to determine this basis is objective. Under this test, even if creditors characterise their claim as BIT-based, the tribunal could, nonetheless, conclude that its basis is essentially contractual. Such determination would generally occur only on the merits. In the jurisdictional phase, the tribunal is limited to assessing whether the facts are capable of constituting the alleged breach of the international obligation(s) in question.15

Lack of a specific connection to ICSID The law governing sovereign debt instruments will be a municipal law, and national courts almost invariably enjoy jurisdiction. Sovereign debt instruments have no specific connection to ICSID. Application of the lex 12 14

15

13 Vivendi v Argentina No.1 (Annulment), para. 96. Woodruff Case (USA v Venezuela). Vivendi v Argentina No. 1 (Annulment). A second annulment request by Argentina also failed, Vivendi v Argentina No. 2 (Annulment). Oil Platforms (Islamic Republic of Iran v USA), separate opinion of Judge Higgins, paras. 32–33; Impregilo v Pakistan, para. 237 (‘the facts as alleged by the Claimant . . . if established, are capable of coming within those provisions of the BIT which have been invoked’); Noble Energy v Ecuador (Jurisdiction), para. 23; Plama v Bulgaria (Jurisdiction), paras. 118–19; SGS v Philippines (Jurisdiction), para. 157.

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specialis principle and the generalia specialibus non derogant principle to sovereign debt with explicit or implied exclusive domestic jurisdiction clauses prevents ICSID from hearing contractual claims. Few sovereign bonds refer to ICSID arbitration, nor have participants in international financial markets – until very recently – contemplated ICSID as an appropriate forum to adjudicate claims arising out of defaulted sovereign debt. Purchasers of sovereign debt do not seem to pay any attention to the existence of BITs. Underwriters and prospective buyers of sovereign debt almost invariably insist on dispute settlement in an important financial centre. For these reasons, sovereign bonds governed by municipal law lack a ‘specific connection’ to ICSID.16 The jurisdictional configuration of sovereign debt departs from the prototypical ICSID foreign investment dispute. Neither does the host country’s law govern the bond, nor do its courts enjoy jurisdiction. Crucially, bondholders enjoy access to an impartial forum, the municipal courts in a financial centre. Due process is generally guaranteed to bondholders, even if they ultimately encounter practical enforcement difficulties. These obstacles are a structural feature of the international legal order in general, just like the lack of legal recourse for states and individuals against the unlawful use of force. On the requirement of a specific connection to ICSID, the tribunal in Joy Mining explained: many ICSID and other arbitral decisions . . . have progressively given a broader meaning to the concept of investment. But in all those cases there was a specific connection to ICSID, either because the activity in question was beyond doubt an investment or because there was an arbitration clause involved. The same holds true of concession contracts in which the investor is called to perform a public service on behalf of the State.17

The tribunal’s restraint in exercising jurisdiction over contracts entirely outside ICSID’s traditional sphere lends further support to the conclusion that ICSID lacks jurisdiction over sovereign debt. Only contractual remedies in national courts are contemplated when sovereign debt instruments are issued, ICSID arbitration is not. Litigation on these complex technical contracts occurs invariably in national courts. Sudden invocation of ICSID arbitration undermines legal certainty in the sovereign debt market, and more generally for all 16

17

Joy Mining v Egypt, para. 59; Malaysian Historical Salvors (Merits), paras. 119–29 (‘readily recognizable investment’). Joy Mining v Egypt, para. 59.


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international financial transactions. Successful bondholder arbitration before ICSID would upset longstanding expectations shared by financial market participants. If future ICSID tribunals follow Fedax, the implications for international financial transactions are potentially enormous. The unity of the contractual bargain negotiated between bondholders and the country could also dissolve.

Treaty and contract claims are intertwined Modern sovereign debt is governed by the municipal law of a foreign financial centre, not by international law. Accordingly, the repayment claim based on the sovereign debt instrument is grounded in some municipal law. This law shapes the claim’s content: existence, ownership and scope. BITs, by contrast, prescribe whether a contractual right is afforded certain treaty protections. The applicable law has no bearing on jurisdiction. Whether an ICSID tribunal enjoys jurisdiction over contractual claims as well as treaty claims is only a function of the interaction between the ICSID Convention and the applicable BIT. The separation of treaty and contractual claims is incomplete. Treaty and contract operate on different, yet connected planes. Limited recourse to municipal law to determine treaty breach is necessary. The assertion that once municipal law has recognised a right, the treaty regime rules take over is common in international law. While international law does assume primacy over municipal law, the takeover is incomplete. Postulating a complete divorce of international from municipal law on the grounds of this time-honoured tenet is mistaken, for two reasons. First, BITs lay down standards of treatment. By definition, these are the ground rules for the host state’s behaviour. Investment treaties do not purport to specify the contours of the claim in question, but only the yardsticks against which alleged violations through the host state’s conduct are to be judged. An international tribunal will then often be unable to examine a treaty claim in isolation from the underlying right of repayment created by the municipal law governing the sovereign debt instrument. The heart of the disagreement concerns the characterisation of treaty and contractual claims. In the words of Vivendi No. 2, an objective assessment of the ‘fundamental basis of the claim’ is needed. Applying SGS v Philippines, if the claims are to be characterised as contractual, then the tribunal ought to stay proceedings pending a decision of the competent

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domestic court, even if the BIT offers arbitration for contract claims. Conversely, the choice of forum clause does not cover treaty claims that creditors may have. One test for the existence of treaty claims is whether the claims in question stand by themselves, independent of the contract. In other words, a treaty claim ‘does not necessarily pass by or posit a contract violation as a fundamental element or premise of its cause of action’.18 The claim cannot have contractual performance as an essential element. Insofar as contractual terms are concerned, the investor is bound by the contract’s dispute settlement clause. In PSEG Global v Turkey, the tribunal found that a dispute may qualify ‘as a treaty-based dispute [if] it is related . . . to the allegation that the Government, through various measures, impeded and ultimately destroyed the investment’.19 Another test concerns whether the state ‘acts in the exercise of its governmental or sovereign authority, rather tha[n] merely as a commercial party’.20 According to another influential view, grounded in the ILC Articles on State Responsibility, to draw a distinction between whether a government acted for commercial or for sovereign reasons is spurious. For attribution, the characterisation of the government’s acts as sovereign acts is crucial. For state responsibility, however, the distinction between acta iure gestionis and acta iure imperii is rarely determinative. The governmental or commercial character of the breach is irrelevant, as is the motive for breach. The Commentary to Article 12 of the Articles on State Responsibility underscores this point: International awards and decisions specifying the conditions for the existence of an internationally wrongful act speak of the breach of an international obligation without placing any restriction on the subject-matter of the obligation breached.21

That said, in many awards, the motivation for breach appears to be at least a factor in characterising alleged treaty breaches.22 But the Articles 18 19 20

21 22

TSA v Argentina, concurring opinion of arbitrator Georges Abi-Saab, para. 5. PSEG Global v. Turkey, para. 173. RFCC v Morocco (Merits), para. 51 (‘un comportement exorbitant de celui qu’un contractant ordinaire pourrait adopter’). ILC, Commentary to Article 12, para. 9. TSA v Argentina, concurring opinion of arbitrator Georges Abi-Saab, para. 9 (motivation as one of the considerations that are sufficient prima facie to constitute the subject matter of a treaty claim).


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on State Responsibility take the view that there is only one relevant question in this context: what is the state obliged to do or to refrain from doing, and has the state complied with that obligation?23 The close analysis of this question forms part of the merits. For present purposes, suffice it to analyse whether the facts as pleaded by claimants may constitute plausible treaty claims under an objective construction of the BIT’s guarantees. Abstracting entirely from applicable municipal law is impossible. General principles of municipal law are important sources of international law.24 Paraphrasing Hersch Lauterpacht, the notion that if an investment is ‘protected by international law it is for that reason at the same time outside the sphere of municipal law is novel and, if accepted, is subversive’ of the international investment regime.25 Proper consideration of a treaty claim sometimes requires thoroughly examining the contractual claim. In this limited respect, recourse to municipal law is necessary. Second, investment law, and international law more generally, is underdeveloped in a central respect. As a matter of general principle found in many municipal laws, extraordinary circumstances might warrant a modification of contractual claims. General regulatory powers in national economic emergencies or lack of payment capacity are pertinent examples. Current international law provides only broad guidance when such circumstances justify non-compliance with international obligations. The lex contractus and general principles of law contain more nuanced answers.26 Recourse to municipal law is also relevant for abstract terms such as fair and equitable treatment. The next section examines whether domestic jurisdiction clauses constitute a bar to ICSID arbitration. Exclusive jurisdiction clauses in sovereign debt instruments could prevent ICSID from hearing both contractual and treaty claims by sovereign creditors.

23 24

25 26

Crawford, ‘Treaty and contract’, 356. International law is part of the general system of law. Cf. Article 38(1) of the ICJ Statute; H. Lauterpacht, Private Law Sources and Analogies of International Law (with Special Reference to International Arbitration) (London, New York: Longmans, Green and Co., 1927). Norwegian Loans Case, separate opinion of Judge Lauterpacht, 37. A good example of this approach is Noble Ventures v Romania (Merits). The tribunal’s definition of the arbitrary treatment standard is guided by a commonality of municipal law.

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B. Choice of forum in sovereign bonds Exclusive and non-exclusive domestic jurisdiction clauses The following is a typical formulation of a non-exclusive domestic jurisdiction clause in a sovereign bond governed by New York law. Country X will irrevocably submit to the non-exclusive jurisdiction of any New York State or federal court in New York City in any related proceeding i.e., any suit, action or proceeding arising out of or relating to the debt securities and Country X will irrevocably agree that all claims in respect of any related proceeding may be heard and determined in such New York State or federal court [emphasis added].

This wording confers non-exclusive jurisdiction on New York State or federal courts. The clause places this sovereign bond firmly in the ambit of New York law, but does not as such bar ICSID arbitration. Arbitration of sovereign bonds is a novel idea, as far as the last decades are concerned. It is not surprising that the wording of the clause is silent on ICSID or UNCITRAL arbitration. Second, consent to ICSID jurisdiction is typically given in a BIT, with no need for a jurisdictional clause in the bond itself. Below is an exclusive domestic jurisdiction clause, occasionally found in sovereign bonds. The parties agree that any claim or suit which may arise in relation hereto or to the Bonds issued shall be subject to the exclusive jurisdiction of the Courts and Tribunals of Madrid, and expressly waive any other venue to which they may be entitled.27

This derogation clause excludes jurisdiction by ‘any other venue’. Would this clause bar an ICSID tribunal from hearing treaty and contractual claims? Absence of the term ‘exclusive’ might be an insufficient basis for concluding that ICSID arbitration is available.28 The question is whether an implicit waiver of ICSID arbitration is possible, either with respect to both treaty and contract claims or only with respect to contract claims. This question is taken up in section C below. In particular, when a sovereign bond lists several modes of adjudication, a careful interpretation might reveal that such formulation was intended to be exclusive.

27 28

Emphasis added. SGS v Philippines, para. 134. Arbitral practice is surveyed in paras. 149–53.


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An example could be a sovereign bond that grants jurisdiction to two or more countries or to courts in one country and concurrent UNCITRAL arbitration, without expressly using the term ‘exclusive’. This scenario could hold for many sovereign bonds that provide for jurisdiction of the issuing country’s courts, in addition to the courts of an important financial centre. This line of reasoning may be challenged on two grounds. First, one could argue that a BIT simply offers sovereign creditors an additional international remedy. Treaty claims could certainly be brought before ICSID tribunals, at least as long as the bond’s jurisdictional clause was non-exclusive. Second, one could argue that these jurisdictional clauses, exclusive or not, never intended to – and hence cannot cover – treaty causes of action. Arbitration agreements derived from BITs are no more solemn than a sovereign bond’s jurisdictional clause. The two modes for the host state to consent to dispute settlement differ in one respect only: one is given in a BIT, the other in a contract governed by municipal law.29 In both cases, the parties to the agreement are the host state and the foreign investor. The SGS v Philippines tribunal suggested that the BIT and a contract governed by national law are on a different footing.30 No hierarchy exists between them. The agreement to submit to ICSID arbitration is on a par with the contractual agreement to submit to the jurisdiction of municipal courts. The next section offers an explanation why BIT consent and the jurisdictional clause in the sovereign debt instrument itself are on an equal footing, preserving the unity of the contractual bargain. The foreign investor’s right to ICSID arbitration differs in this respect from the state of nationality’s right of diplomatic protection. On this theory, there is no reason to exclude a priori the possibility that jurisdictional clauses may also cover treaty claims.

Preserving the unity of the contractual bargain Extending the preclusive effect of exclusive jurisdictional clauses in sovereign debt instruments to treaty causes of action preserves the unity of the contractual bargain.31 If, despite an exclusive domestic jurisdiction clause in the bond or a valid exercise of CACs,32 creditors request 29

30 32

Z. Douglas, ‘The hybrid foundations of investment treaty arbitration’, BYBIL, 74 (2003), 248. 31 SGS v Philippines, para. 142. Douglas, ‘Hybrid foundations’, 243. On collective action see chs. 12.A and 13.E.

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arbitration, they are then pleading the breach of one term, while not observing another of the very same contract. ICSID jurisdiction in such circumstances could effectively allow one party to change the contractual bargain at its discretion and override the exclusive jurisdictional clause. Such an outcome is inconsistent with ICSID’s aim of contributing to a stable and positive investment climate. It would also turn expectations in the sovereign debt market and on international financial transactions more generally on their head, thereby undermining legal certainty. ICSID case law generally safeguards the contractual bargain. The SGS v Philippines tribunal explained: It is not to be presumed that such general provision [the BIT] has the effect of overriding specific provisions of particular contracts, freely negotiated between the parties . . . [a BIT is] a framework treaty, intended by the State Parties to support and supplement, not to override or replace, the actually negotiated investment agreement made between the investor and the host State.33

Telenor v Hungary found that ‘to invoke the MFN clause to embrace the method of dispute resolution is to subvert the intention of the parties to the basic treaty, who have made it clear that this is not what they wish’.34 The result of this analysis is that creditors will be unable to request ICSID arbitration on the sovereign debt instrument while simultaneously disregarding an exclusive jurisdictional clause in the same contract. Conversely, non-exclusive jurisdiction clauses in favour of national courts leave ICSID jurisdiction over both treaty and contract claims untouched. Finally, a largely unexplored question is the possibility of foreign investors waiving ICSID arbitration by exclusively submitting to a domestic forum. The section below addresses this issue.

C. Waiver of the right to arbitration This section first examines previous decisions on waiving the right to arbitration. It then sets out reasons why, in the new regime of investment treaty arbitration, foreign investors enjoy the contractual freedom to waive their own right to ICSID arbitration, including over treaty claims, unless the intent of the treaty parties indicates otherwise. 33

SGS v Philippines, para. 141.

34

Telenor v Hungary ( Jurisdiction).


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The investor’s right to arbitrate is distinct from the state of nationality’s residual right to diplomatic protection. As has long been recognised, the state of nationality exercises its own right under diplomatic protection, even if its national suffered the factual harm. The individual suffering the harm has no functional control over claims belonging to the country of nationality and, hence, cannot waive that right. As the PCIJ famously stated in Mavrommatis: [by] taking up the case of one of its subjects and by resorting to diplomatic action or international judicial proceedings on its behalf, a State is in reality asserting its own rights – its right to ensure, in the person of its subjects, respect for the rules of international law.35

The ICJ in the Nottebohm Case underscored that the bearer of diplomatic protection is the state: ‘Diplomatic protection and protection by means of international judicial proceedings constitute measures for the defence of the rights of the State.’36 The modern principle is found in Article 27 of the ICSID Convention which excludes the exercise of diplomatic protection by the state of nationality when consent to ICSID arbitration has been given: No Contracting State shall give diplomatic protection, or bring an international claim, in respect of a dispute which one of its nationals and another Contracting State shall have consented to submit or shall have submitted to arbitration under this Convention, unless such other Contracting State shall have failed to abide by and comply with the award rendered in such a dispute.

Waiver in mixed commissions awards Calvo Clauses waive the right to apply to an international forum for legal protection and instead mandate exclusive reliance on local remedies. The Calvo Doctrine of diplomatic and military non-intervention concerning protection of private property, including debt, and Calvo Clauses have long been controversial among international lawyers. In contrast to the Calvo Doctrine, a doctrinal proposal for a principle of international law, Calvo Clauses are an expressly agreed term of the investment contract.37 35 36 37

Mavrommatis (Greece v United Kingdom), 12. Nottebohm Case (Liechtenstein v Guatemala), 24. K. Lipstein, ‘The place of the Calvo Clause in international law’, BYBIL (1945), 133–45, 132 (‘free choice of law’); L. M. Summers, ‘La Clause Calvo: tendances nouvelles’, Revue de Droit International, 7 (1915), 567, 574; A. Feller, The Mexican Claims Commissions, 1923–1934 (New York: The Macmillan Company, 1935), 185–200.

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The majority regards the attempt of Calvo Clauses to override a country’s right to diplomatically protect its citizens as ineffective.38 Mixed commissions, however, on occasion regarded the presentation of claims before them as distinct from diplomatic protection, and took the presence of a Calvo Clause into account in adjudicating claims of private individuals.39 Lipstein notes that a number of arbitral awards accept the validity of the Calvo Clause provided it remains limited to contract claims. Some tribunals also extend the scope of the clause to treaty causes of action, an approach other tribunals reject. He frames the question in this latter case as whether the Calvo Clause applies to ‘breaches of collateral obligations resulting from acts extraneous to the contract’ – treaty claims in modern parlance. This is a very useful mode of analysis.40 An early version of the Calvo Clause is found in Argentina’s reservation to the Hague Convention Respecting the Limitation of the Employment of Force for the Recovery of Contract Debts of 1907. With regard to debts arising from ordinary contracts between the citizen or subject of a nation and a foreign government, recourse shall not be had to arbitration except in the specific case of a denial of justice by the courts of the country where the contract was made, the remedies before which courts must first have been exhausted.41

In the Flannagan Case before a United States–Venezuela mixed commission, the claimant brought a claim on sovereign bonds, which contained the following Calvo Clause.42 38

39

40 41

42

North American Dredging v Mexico (‘there exists a generally accepted rule of international law condemning the Calvo Clause’); Lipstein, ‘Calvo Clause’, 130 (‘these sweeping statements’ have ‘failed to obtain the approval of international lawyers’ outside of Latin America); L. Oppenheim and A. D. McNair, International Law, a Treatise (London: Longmans, 1928), 296; E. Borchard, The Diplomatic Protection of Citizens Abroad (New York: Banks Law Publishing, 1915), 797; League of Nations, Bases of Discussion, vol. III (Responsibility of States), 135; Harvard Research in International Law, 23 AJIL, Supplement April 1929, 202, Article 17; A. V. Freeman, ‘Recent aspects of the Calvo Doctrine and the challenge of international law’, AJIL, 40 (1946), 121–47, 130; Idem, The International Responsibility of States for Denial of Justice (London: Longmans, 1938), 469–88. Summers, ‘La Clause Calvo’, 578; but see M. Koessler, ‘Government espousal of private claims before international tribunals’, Chicago Law Review, 13 (1946), 180–94, who assimilates presentation of such claims to diplomatic protection. Lipstein, ‘Calvo Clause’, 135–38. International Convention Respecting the Limitation of the Employment of Force for the Recovery of Contract Debts, signed at The Hague, 18 October 1907 (‘Drago–Porter Convention’). See also G. W. Scott, ‘Hague Convention restricting the use of force to recover on contract claims’, AJIL 2 (1908), 78, 90. Flannagan v Venezuela (USA v Venezuela).


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Doubts and controversies which at any time might occur in virtue of the present agreement shall be decided by the common laws and ordinary tribunals of Venezuela, and they shall never be, as well as neither the decision which shall be pronounced upon them, nor anything relating to this agreement, the subject of international reclamation.

Commissioner Findlay, speaking for the 2:1 majority of the commission, held that the Calvo Clause barred the claimants from referring the contractual claim to the commission. The majority construed the term ‘international reclamation’ to include both formal diplomatic protection and adjudication by international arbitration. The buyers on the bonds had agreed that all question of liability on the bonds was to be decided by Venezuelan courts: Nothing could be clearer, more comprehensive or specific than the language of the concession upon this point . . . We have no right to make a contract which the parties themselves did not make, and we would surely be doing so if we undertook to make the subject of an international claim, to be adjudicated by this commission, in spite of their own voluntary undertaking that it was never to be made such, and should be determined in the municipal tribunals of the country with respect to which the controversy arose. [The claimants] made their bed and so they must lie in it.43

The commission upheld the validity of the waiver contained in the sovereign bond: the claimant by his own voluntary waiver has disabled himself from invoking the jurisdiction of this Commission, and for that reason, as well as that the cause of action has been misconceived, and proofs therefor not supplied that otherwise might have been forthcoming, we will disallow the claims and dismiss the petitions without prejudice.44

Commissioner Little, in dissent, argued that the formulation of the clause did not and indeed could not preclude diplomatic protection if the treatment of the bondholder amounted to a breach of international law: ‘[a] citizen may no doubt, lawfully agree to settle his controversies with a foreign state in any reasonable mode or before any specified tribunal. But the agreement must not involve the exclusion of international reclamation. That question sovereigns only can deal with.’ The dissent encapsulates the traditional objection to the Calvo Clause. According to this view, Calvo Clauses are ineffective because the right of diplomatic protection belongs to the state of nationality. Individuals are 43

Moore, Arbitrations, vol. 4, 3564.

44

Ibid.

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not bearers of this right and, hence, cannot give it up. This longstanding view is an accurate reflection of international law on diplomatic protection. However, the new investment treaty regime departs explicitly from that model of protecting the property of foreign nationals. In North American Dredging, a case concerning a claim for breach of contract, the American–Mexican Claims Commission described an investor’s attempt to override the jurisdictional clause of the contractual bargain, the basis for his claim, thus: ‘The claimant, after having solemnly promised in writing that it would not ignore the local laws, remedies and authorities, behaved from the very beginning as if [the jurisdiction clause] of its contract had no existence in fact.’45 North American Dredging does not stand for the proposition that Calvo Clauses are generally effective. Rather, the commission carefully circumscribed the effect of the clause. If the claimant had presented a claim for breach of international law (treaty causes of action), ‘it might have presented such a claim to its government which, in turn, could have espoused it and presented it here [notwithstanding the Calvo Clause]’. In the instant case, the commission dismissed the contractual cause of action, since it found no proof of resort to the Mexican courts as stipulated in the contract, or of denial of justice. Other awards uphold the unity of the contractual bargain. In Rogerio v Bolivia, the commission declined jurisdiction ‘because it is not proper to divide the unity of a judicial act, sustaining the effect of some clauses and the inefficacy of others’.46 In the Orinoco Steamship Case, the Mexico– US Claims Commission denied the host state the right to present the case before the commission on the grounds of a valid Calvo Clause. The commission explained that the unity of the contractual bargain and justice implied that the contract could not be ‘a chain for one party and a screw press for the other’.47 BITs grant individuals direct rights of action against host countries. While there is a residual right to diplomatic protection, the investor’s right to bring a claim and the host country’s right to exercise diplomatic protection are distinct. The investor cannot, of course, give up the country of nationality’s residual right to diplomatic protection.48 In contrast,

45

46 48

North American Dredging v Mexico. Cf. also Mexican Union Railway (Great Britain v Mexico); International Fisheries Company (US v Mexico), Claims Commission of the United States and Mexico, opinions of commissioners (1931), 207. 47 Rogerio v Bolivia, 69. Orinoco Steamship v Venezuela. Article 27 of the ICSID Convention.


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there is no reason why the investor should not be able to give up her own right to ICSID arbitration via contract. The BIT offers arbitration, and the investor rejects that offer by submitting to the exclusive jurisdiction of national courts. The Rudloff tribunal adopted a different approach. When the matter came before the commission, the case was pending in a municipal court. The umpire sustained jurisdiction, arguing that the exclusive domestic jurisdiction clause did not by itself bar jurisdiction, since such stipulation does not ‘deprive [the claims] of any of the essential qualities that constitute the character which gives the right to appeal to this commission’.49 The jurisdictional clause could, however, infect the claim before the commission with a vitium proprium. In the view of the umpire, this question was one of admissibility and already concerned the merits, so jurisdiction was affirmed. The Flannagan Case was resubmitted as the Woodruff Case to the US–Venezuela Claims Commission of 1903. Commissioner Bainbridge favoured jurisdiction, holding that the previous award did not constitute res judicata. Commissioner Paul, in contrast, declined jurisdiction with reference to the reasoning of Commissioner Findlay. Umpire Barge rejected the argument that the 1903 Protocol overrode the exclusive claims clause in the contract: The judge, having to deal with a claim fundamentally based on a contract, has to consider the rights and duties arising from that contract, and may not consider a contract that the parties themselves did not make, and he would be doing so if he gave a decision in this case and thus absolved from the pledged duty of first recurring for rights to the Venezuelan courts, thus giving a right, which by this same contract was renounced, and absolve claimant from a duty that he took upon himself by his own voluntary action.50

The umpire ruled that ‘by the very agreement that is the fundamental basis of the claim, it was withdrawn from the jurisdiction of this Commission’. When treaty claims and contract claims are intertwined and the fundamental basis of the claim is contractual, the domestic jurisdiction clause controls. The ad hoc committee on annulment in Vivendi v Argentina, the leading case on the distinction between treaty and contract claims, followed the

49 50

Rudloff Case (Interlocutory). Woodruff Case (US v Venezuela); W. L. Penfield, The Venezuelan Arbitration before the Hague Tribunal, 1903 (Washington, DC: Government Printing Office, 1905), 151.

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Woodruff approach.51 The claimant operated a water and sewage system under a contract which conferred exclusive jurisdiction on Tucuman’s administrative tribunals for the interpretation and application of the contract. The investor initiated ICSID arbitration, alleging violations of the France–Argentina BIT through mandatory service obligations and rate increases. The BIT’s offer to arbitrate covered ‘any dispute relating to investments’. The tribunal found that the claims all arose from disputes concerning the performance of the contract, and it took the view that contractual breaches differed from treaty violations. In view of the exclusive jurisdictional clause in the contract, the tribunal held that the claimant first had to bring proceedings before Tucuman’s administrative tribunals. The annulment committee annulled the award on this point. The tribunal failed to decide whether Argentina’s conduct violated the BIT, a manifest error of jurisdiction, because its jurisdiction to consider treaty breaches was unaffected by the clause.52 In a case where the essential basis of a claim brought before an international arbitral tribunal is a breach of contract, the tribunal will give effect to any valid choice of forum clause in the contract . . . On the other hand, where ‘the fundamental basis of the claim’ is a treaty laying down an independent standard by which the conduct of the parties is to be judged, the existence of an exclusive jurisdiction clause in a contract between the claimant and the respondent state or one of its subdivisions cannot operate as a bar to the application of the treaty standard.

Yet, since treaty and contractual breach were intertwined, it refused to exercise jurisdiction in this instance until the contractually chosen forum had decided on the fundamentally contractual claim. The ad hoc committee annulled the award on that point for manifest excess of powers. In its view, the tribunal should have exercised its jurisdiction over treaty claims in present circumstances. In SPP v Egypt, the tribunal held that an exclusive specific arbitration agreement would take precedence over the BIT concluded between the investor’s state of nationality and Egypt, on the basis of the principles of generalia specialibus non derogant and posterior tempore, potior iure.53 The BIT does not affect pre-existing dispute resolution clauses.

51 52 53

Vivendi v Argentina No. 1 (Annulment), paras. 98–101. Ibid., paras. 98, 101; SGS v Pakistan, para. 174; Impregilo v Pakistan, para. 216. SPP v Egypt No. 2 ( Jurisdiction), para. 83.


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In both SGS v Pakistan and SGS v Philippines, the claimants had entered into pre-shipment inspection agreements. In the Pakistani case, the agreement provided for domestic arbitration in Pakistan. The dispute before the ICSID tribunal concerned the non-payment by Pakistan of SGS’s invoices, which SGS characterised as BIT violations. Pakistan argued that the essential basis of SGS’s claims was contractual, which the parties had agreed to refer to domestic arbitration. The tribunal noted that the same set of facts could give rise to contract and treaty claims, relying on the annulment decision in Vivendi. The clause providing for domestic arbitration did not affect the tribunal’s jurisdiction over treaty claims. But it implied that the tribunal lacked jurisdiction over contract claims.54 In SGS v Philippines, the Philippines conceded that most of the amount due under a pre-shipment inspection contract was payable but a smaller portion of the amount was disputed.55 The Swiss–Philippine BIT provided for ICSID jurisdiction generally for ‘disputes with respect to investments’. The tribunal found that this formulation covered not only BIT violations but also disputes arising from investment contracts. The tribunal affirmed its jurisdiction over contractual claims. It resolved conflicting consent in the presence of an exclusive domestic jurisdiction clause using the lex specialis principle.56 However, noting the exclusive and specific character of the dispute settlement clause in the investment contract, which could not be overridden by a general provision for dispute settlement in a BIT,57 the tribunal stayed the proceedings pending a decision of the Philippine courts as provided for in the contract. Hence a contractual claim under a BIT cannot be brought disregarding an applicable exclusive domestic jurisdiction clause. In his dissent, Arbitrator Crivellaro stressed that since the BIT only offers arbitration, no arbitration agreement exists until the investor initiates arbitration.58 The tribunal preferred the parties’ contractual choice of forum for contractual causes of action, based on the generalia specialibus non derogant principle. A specific contractual dispute resolution clause takes priority over the BIT. The Flannagan, Woodruff and Rudloff cases share a common point. The bondholder is unable to waive recourse to the mixed commission, as this right belongs to her country of nationality. These cases stand for the traditional position that Calvo Clauses are ineffective, as the 54 56

55 SGS v. Pakistan (Jurisdiction), paras. 156–73. SGS v. Philippines ( Jurisdiction). 57 58 Ibid., para. 141. Ibid., para. 154. Ibid., Crivellaro dissent, paras. 9, 10.

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national does not have power to modify a right that belongs in reality to his country of nationality. In this vein, Judge Little, dissenting in Flannagan, wrote: ‘[A] contract between a sovereign and a citizen of a foreign country not to make matters of difference or dispute, arising out of an agreement between them or out of anything else, the subject of an international claim, is [not] consonant with sound public policy, or within their competence.’ This ‘would involve pro tanto a modification or suspension of public law’.59 The Venezuelan Arbitration of 1903 also held that ‘[t]he right of a sovereign power to enter into an agreement of this kind is entirely superior to that of the subject to contract it away’.60 The next section presents the argument that in the new regime of investment treaty arbitration, the foreign investor is able to decline the BIT’s offer of arbitration by waiving that right.

Waivers in ICSID arbitration ICSID departs from the tradition of mixed commissions. BIT obligations are owed to individual investors directly. Yet the issue of waiving the right to ICSID arbitration is highly controversial. The SGS v Philippines tribunal remarked that private investors are generally unable to give up their rights under international law, since they are usually of a public interest character: ‘It is, to say the least, doubtful, that a private party can by contract waive rights or dispense with the performance of obligations on the State parties to those treaties under international law.’61 In a similar vein, the Aguas del Tunari tribunal held that since parties could jointly agree to a dispute resolution mechanism different from ICSID, it followed that ‘an investor could also waive its rights to invoke the jurisdiction of ICSID’.62 However, a merely conflicting forum selection clause was held to be insufficient. The tribunal required a waiver of ICSID jurisdiction. A tribunal will not imply such a waiver without evidence.63 Express waiver is required. With regard to substantive BIT rights, the tribunal’s general statement might be correct. For the mode of adjudication, however, the public interest character is the exception, not the rule, provided the investor can invoke the BIT’s substantive protections before the contractually 59 60 62

Flannagan v Venezuela (US v Venezuela), Judge Little; Ralston, Law and Procedure, 61. 61 Penfield, The Venezuelan Arbitration, 819, 841. SGS v Philippines, para. 154. 63 AdT v Bolivia ( Jurisdiction), para. 118. Ibid., para. 118.


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chosen forum. In the great majority of cases, creditors have access to the courts in an important financial centre, aside from the national courts in the debtor state. A clear indication of this public interest in the BIT is necessary. Bondholders may waive the ICSID route of enforcement via an exclusive domestic jurisdiction clause, unless an important public interest is at stake. Such waivers may preclude bondholders from bringing both treaty as well as contractual causes of action before ICSID tribunals. In Lowe’s words, the policy reason for allowing waivers is the following: ‘An investment treaty tribunal has no independent interest in hearing a case that transcends the consent of parties, unlike the interest of a municipal court in enforcing the law of a particular polity.’64 Douglas explains that ‘the national contracting state of the claimant has only a marginal interest in the investor/state arbitration proceedings’.65 Jessup underscored that the traditional opposition of developed countries to the Calvo Clause ‘loses all logical force’ if it is the individual himself who has the right under international law, and refers in this context to established international claims commissions.66 The individual ‘should not be free to oust the international jurisdiction unless an adequate substitute is utilized’. Jessup submits that ‘international public policy should only ban [such Calvo] clauses as would prevent the impartial review by some tribunal freely chosen by the parties. It may be argued that if the parties freely choose in advance to accept the final decision of the local courts, this agreement should be sustained. In the typical construction contract there may be sufficient equality of bargaining power between the foreign corporation and the contracting state to warrant such a conclusion.’67 Investors who negotiate investment contracts with foreign governments should know about the BIT’s offer of ICSID arbitration. In many municipal legal systems, individuals cannot rely on the defence of ignoring the law. If this is true for consumers, foreign investors, who on average will be more sophisticated, ought to be held to the same standard. 64

65

66 67

Lowe, ‘Overlapping jurisdiction’, 198–99; cf. also O. Spiermann, ‘Individual rights, state interests and the power to waive ICSID jurisdiction under bilateral investment treaties’, Arbitration International, 20 (2004), 179–211. Z. Douglas, The International Law of Investment Claims (Cambridge University Press, 2009), para. 337, 162. P. C. Jessup, A Modern Law of Nations. An Introduction (New York: Macmillan, 1956), 111. Ibid.

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By including exclusive domestic jurisdiction clauses in an investment agreement, investors waive ICSID arbitration. They reject the offer to arbitrate. This analysis does not translate to the scenario where no BIT was in place at the time the contract was negotiated. This is the reverse situation of an individual who submits to arbitration for disputes arising out of credit card agreements, thereby opting out of the general background norm of recourse to the courts. For reasons of symmetry, the requirements for the reverse waiver ought to be identical. Exclusive domestic jurisdiction clauses might waive the right to ICSID arbitration generally, that is, over treaty and contractual claims. Acceptance of exclusive domestic jurisdiction, without indication to the contrary, implies that the investor concurrently rejects the BIT’s offer to arbitrate under ICSID. Whether such waiver extends to treaty causes of action depends on the clause’s formulation. Only non-exclusive domestic jurisdiction clauses leave ICSID jurisdiction to hear both types of claims untouched. Domestic jurisdiction clauses concern jurisdiction. For reasons of expediency, it is appropriate for tribunals to determine the effect of domestic jurisdiction clauses at the jurisdictional stage of the proceedings. If necessary, the tribunal ought to stay the proceedings until the contractual forum with competence over essentially contractual claims reaches a decision. This contrasts with the view of the SGS v Philippines tribunal, according to which such clauses go to the admissibility of the claim, rather than jurisdiction. The SGS tribunal stayed its proceedings pending the ‘determination of the amount payable in accordance with the contractually-agreed process’ on the basis that SGS’s contractual claim was ‘premature’.68 In SPP v Egypt, the tribunal stayed the proceedings to await the outcome of a pending appeal of an ICC award before the Cour de Cassation.69 In summary, BITs grant investors a direct right of action against the host state, without any intermediation of the state of nationality. Foreign investors bring their own claims. As part of their freedom to contract, foreign investors are generally able to contract out of ICSID arbitration, unless the BIT indicates that the state parties intended ICSID arbitration to be unwaivable because an important public interest is at stake.

68

SGS v Philippines, para. 163.

69

SPP v Egypt ( Jurisdiction), paras. 80–84.

12

Sovereign default as trigger of responsibility

This chapter explores whether defaults on sovereign bonds or sovereign debt restructurings trigger the defaulting country’s international responsibility. This chapter examines four specific treatment standards: most-favoured nation (MFN) treatment, national treatment, expropriation, and fair and equitable treatment. It is important to keep in mind that these treatment standards differ across individual BITs.

A. Most-favoured nation and national treatment The national treatment and MFN clauses in BITs allow bondholders to assert discrimination based on nationality. National treatment clauses could oblige the issuing country to grant the same treatment to covered foreign bondholders as to its domestic bondholders, or to all creditors more generally. MFN clauses could allow foreign bondholders to benefit from more-favourable privileges granted to third-country bondholders.1 Modern sovereign bonds are atomised debt instruments. Countries will often know neither the identity nor the nationality of their bondholders. When a sovereign debt restructuring becomes necessary, this informational constraint is often severe. Discriminating between domestic and foreign bondholders was easier when nationals of the issuing country bought mainly domestic bonds and foreign citizens bought mainly external bonds. Yet this division has become less clear-cut over time. Even if a country desired to treat its bondholders unequally, 1

Some BITs include specific debt restructuring annexes which limit treatment obligations on public debt to MFN and national treatment. Cf. the Chile–US FTA and the Uruguay–US BIT discussed in ch. 10.E above.

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purposeful discrimination against foreign bondholders within a single bond issue, while not impossible, is difficult in practice. Today, the primary fault line of differences in treatment is between bondholders who participate in a restructuring and those who choose to retain their old bonds. To assure participating bondholders that nonparticipating creditors would not receive more favourable treatment, the Argentine bond exchange included a most-favoured creditor clause. This clause grants participating bondholders the right to substantially similar compensation in cash or kind received by non-participating creditors in a future exchange offer. The first type of discrimination is unlikely to give rise to an MFN claim, as nationality is not the discriminating factor. There might be scenarios in which bondholders of one nationality receive slightly less than bondholders of another (a larger haircut), in apparent violation of the BIT’s MFN clause. While such discrepancies in treatment among external bondholders could arise in principle due to application of different terms in the original bonds, de facto discrimination among foreign bondholders is unlikely to be substantial. What about de facto asymmetric effects on creditors, on the one hand, who are nationals of the defaulting state and, on the other hand, all other creditors? The relevant metric for assessing differential treatment is whether the terms offered to the various holders and actual payments received were non-discriminatory with respect to foreign and national holders. National treatment claims might be more promising. Domestic debt is often restructured under different terms from those for external debt. A national treatment claim could arise if a foreign bondholder suffered a deeper haircut in the external debt restructuring than a national bondholder affected by the domestic debt restructuring. Because debt instruments often differ substantially in their legal and financial terms, in practice proof of discrimination might be difficult. Moreover, loss calculation depends on the holder’s individual circumstances, such as the time and price of purchase. The policy implications of MFN and national treatment obligations on sovereign debt remain unexplored. These two treatment obligations could curtail a country’s room for manoeuvre in sovereign debt restructurings. Application of the two clauses raises delicate normative judgments on the unity of the BIT’s treaty bargain. The potential unravelling of the BIT’s treaty bargain echoes the argument developed in the section on preserving the unity of the contractual

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bargain.2 Analysis of this issue is in its infancy. For complex BITs, the analysis needs to go beyond professing to an absolute prohibition of differentiated treatment by nationality in the abstract, disregarding specific substantive rights and obligations created by the BIT/FTA. Otherwise, virtually, every sovereign debt restructuring will run foul of MFN and national treatment. Three main cases come to mind: could a bondholder who is a national of country X claim the same treatment as bondholder of nationality Y? Could jurisdiction be extended to cover sovereign bonds? Would the clause allow access to a more favourable dispute settlement mechanism? The following three examples illustrate this tension. First, suppose the BIT between countries X and Y restricted treatment obligations with respect to sovereign debt to national treatment and MFN.3 Second, assume the BIT between X and Z covered sovereign bonds, but the BIT between X and Y did not. Finally, imagine the X–Y BIT provided for dispute settlement solely in domestic courts.4 The first example concerns the BIT’s substantive protections; the second and third are procedural. An MFN clause in the X–Y BIT could enable a Y bondholder to benefit from more expansive jurisdiction, greater scope of protection or international arbitration based on the more favourable X–Z BIT. ICSID case law on propagation of substantive and procedural thirdparty benefits via the MFN clause is in flux.5 Whether MFN clauses cover only substantive or also procedural benefits, including jurisdiction is contentious. This book restricts itself to pointing out some implications for sovereign debt restructurings and the procedural bundling of sovereign bond claims. In Maffezini, the tribunal held that the MFN clause applies to dispute resolution, and not solely to BITs’ substantive protections.6 As counterbalance, the tribunal developed a list of judge-made public policy exceptions to the MFN clause (exhaustion of local remedies,7 fork in the road 2 3 4 5

6 7

See ch. 11.B above. Cf. the Sovereign Debt Restructuring Annex of the US–Uruguay BIT; see ch. 10.E above. Cf. the Australia–US FTA, which provides solely for domestic dispute settlement. E. Gaillard, ‘Establishing jurisdiction through a Most-Favored-Nation Clause’, NYLJ, 233 (2005), 3–6, discusses the case law; R. Dolzer, ‘Fair and equitable treatment: a key standard in investment treaties’, International Lawyer, 39 (2005), 87–106; R. Teitelbaum, ‘Who’s afraid of Maffezini? Recent developments in the interpretation of Most Favored Nation clauses’, J Int’l Arb, 22 (2005), 225–38. Maffezini v Spain (Merits). Recourse to arbitration only after domestic remedies prove unsuccessful.

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provisions,8 and submission to a particular arbitral forum). In the tribunal’s view, these public policy exceptions are implicit in the BIT. The parties’ central public policy considerations are outside the scope of the MFN clause, even without explicit exceptions for MFN clauses in the BIT. In Tecmed, the tribunal applied Maffezini’s public policy exception framework and held that BITs’ ‘core matters’ are exempt from the application of the MFN clause.9 Similarly, the tribunal in National Grid v Argentina, after endorsing Maffezini, pointed out that the MFN clause applied to dispute settlement, but could not grant access to a different type of arbitration.10 By contrast, Plama v Bulgaria considerably restricted the scope of the MFN clause in procedural matters.11 The progressively more expansive interpretation of MFN clauses a` la Maffezini raises the spectre of procedural bundling of numerous bondholder claims. There are precedents in ICSID case law where there was more than one claimant. Such bundling is likely to require identical claims of bondholders with different nationality. Or bondholders could have the same nationality, but on different bonds. Invocation of substantial and procedural benefits in third-party BITs via MFN clauses could be the critical ingredient for achieving this goal. There is no precedent for bundling the claims of a large number of creditors in a single arbitration (a mass claim).

Bundling creditor claims It is unclear how the Centre would deal with a large number of parallel bondholder claims bundled together in a single ICSID arbitration. If each bondholder had to pay the registration fee for ICSID arbitration,12 the costs of arbitration could be prohibitive for all but large bondholders. The alternative is that all the bondholders are regarded as one party for purposes of fees. MFN clauses could be used to replicate some of the features of ‘class actions’. It would only be a ‘class’ in the sense that a large number of bondholders would act together and their claims would be arbitrated as a group. Technically speaking, ICSID has no procedure for US-style class actions. Unlike in such class actions, a small group of representative bondholders would also not represent the interests of all bondholders. 8 9 10 11 12

Once a particular mode of adjudication is chosen, the other is no longer available. Tecmed v Mexico (Merits), para. 69. National Grid v Argentina (Jurisdiction), paras. 86–93. Plama v Bulgaria ( Jurisdiction), para. 209. A fee of US$25,000 is payable to ICSID at the time of registration.


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Potentially, thousands of bondholders spread across various jurisdictions and subject to different BITs could then pursue their claims in a single ICSID arbitration (a mass claim). If bondholders of various nationalities bundled their claims together, the complexity of the dispute would be much greater. Broches outlined an interesting pooling alternative using contractual arbitration (‘with privity’): If . . . the transaction takes the form of a public bond issue, implying wide distribution, a different treatment is called for . . . The arbitration agreement could then be concluded between the borrower and the trustee . . . and the parties could provide that the latter’s nationality shall be exclusively relevant for the determination of the jurisdiction of the Centre . . . Such provisions would seem permitted both by the letter and the spirit of the Convention.13

His suggestion raises the question whether an individual bondholder might not lack standing to initiate ICSID arbitration. It is conceivable that only the holder of the global bond under the trust indenture or the agency agreement would be deemed to have standing to initiate ICSID arbitration. Standing on global bonds surfaced in US sovereign debt litigation, but was not resolved on the merits.14 A special-purpose vehicle collecting bondholder claims is a related option for bringing a mass claim. Bondholders would transfer legal title to the entity for the purpose of negotiation and possible litigation. A good example is the Argentine Bond Restructuring Agency plc (ABRA) incorporated in Ireland after the Argentine default. As long as such a vehicle does not lead to an effective change in nationality, this could be a possible avenue to collectively enforce sovereign bonds. Provided the vehicle has legal personality, it is likely to enjoy standing before ICSID.15 A final option for a mass claim is for bondholder organisations to collect powers of attorney from thousands of bondholders with the same nationality. Arbitration is then initiated in the bondholders’ own name. In this view, it is immaterial whether there is one claimant or a thousand claimants. Restricting claimants to a single nationality offers the advantage that the BIT obligations with respect to the bondholders

13

14 15

A. Broches, Selected Essays: World Bank, ICSID, and Other Subjects of Public and Private International Law (Dordrecht: M. Nijhoff, 1995), 248. Fontana v Argentina (2005). Article 25 (2) (b) speaks of ‘juridical persons’; Schreuer, Commentary I (‘legal personality under some legal system’ needed).

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would be identical. It remains to be seen how ICSID will cope with the multitude of claimants in a mass claim. Such bundling of sovereign creditor claims is also likely to shift bargaining power to non-participating creditors as a group, away from participating bondholders and the country in default, with the potential to exacerbate the collective action problem and the resolution of sovereign debt crises. One channel through which this effect could operate is reduced costs of enforcement. Yet obstacles to such bundling, in particular across nationalities, seem formidable. The next section examines expropriation, another treatment obligation commonly found in BITs and one which holds promise for sovereign bondholders.

B. Expropriation Defaults on sovereign bonds or a chain of actions by the sovereign in the lead up to or during debt restructurings could be argued to constitute direct or indirect expropriation. A threshold question is the scope of protected property under the ICSID Convention and a BIT. The question is whether intangible rights such as contractual rights, including sovereign debt, are subject to expropriation.16 The answer to this question is in flux.

State versus commercial acts Despite the broad scope for expropriation, not every type of act resulting in economic loss to the investor amounts to an expropriation. According to one view, only state acts are susceptible of constituting expropriation.17 In the Jalapa Railroad Case, the government had declared a clause in the contract null and void. The tribunal explained that: whether the breach of contract . . . was an ordinary one involving no international responsibility or whether said breach was effected arbitrarily by means of a governmental power illegal under international law . . . the 1931 decree of the same legislature . . . was clearly not an ordinary breach of contract. Here [the government] . . . stepped out of the role of contracting party and sought to escape vital obligations under its contract by exercising its superior governmental power.18 16 18

17 For this threshold question, see Chapter 9.E. RFCC v Morocco (Merits). Jalapa Railroad v Mexico (US v Mexico); cf. also Impregilo v Pakistan, para. 261.


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The question whether state acts may be qualified as expropriation depends on whether states slip into their commercial or sovereign shoes. RFCC v Morocco held that expropriations are generally carried out ‘through legislative acts or regulations, whether specific or general’ while acts tantamount to expropriation could consist in state intervention even in the absence of such acts.19 Conversely, if the state acts solely as a commercial player, the qualification of that act as expropriation is excluded. The restriction to state acts suggests the following analysis. Could a private corporation have successfully carried out a similar restructuring? Put differently, did the government use specific regulatory, administrative or governmental powers in its sovereign bond exchange? When a government restructures its debt obligations like a corporation, it will typically act like a contract party. Hence, that act would escape qualification as an expropriatory measure. This point is recognised in Impregilo, where the tribunal found that a host state acting as contract party did not interfere with a contract. It merely breached the contract. The tribunal explained that lack of performance did not amount to a treaty breach, ‘unless it is proven that the State or its emanation has gone beyond its role as a mere party to the contract, and has exercised the specific functions of a sovereign authority’.20 This award points to the longstanding general principle: a breach of contract governed by domestic law does not automatically breach international law.21 Judge Schwebel, for instance, emphasised that only arbitrary breaches of contract trigger state responsibility: ‘a State is responsible under international law if it commits not any breach, but an arbitrary breach of a contract between that State and an alien. What is “arbitrary”? It is breach “for governmental rather than commercial reasons”.’22 Arbitral awards have drawn a similar distinction. The Impregilo tribunal explained that a treaty breach is ‘the result of behavior going beyond

19 21

22

20 RFCC v Morocco (Merits), para. 65. Impregilo v Pakistan, para. 276. E. Borchard, The Diplomatic Protection of Citizens Abroad (New York: Banks Law Publishing, 1915), 799; K. Lipstein, ‘The place of the Calvo Clause in international law’, BYBIL, 22 (1945), 132, 142. S. Schwebel, ‘On whether breach by a state of a contract with an alien is a breach of international law’, in Justice in International Law, Selected Writings of Stephen Schwebel (Cambridge: Grotius, 1994), 425–35, 434.

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that which an ordinary contracting party could adopt . . . Only the State in the exercise of its sovereign authority (‘puissance publique’), and not as a contracting party, may breach the obligations assumed under the BIT.’23 The Joy Mining tribunal also drew a distinction between ‘commercial aspects of a dispute and other aspects involving the exercise of some forms of State interference with the operation of the contract involved’.24 In Sempra, the tribunal explained that ‘major legal and regulatory changes’ are not ‘mere contractual breaches of a commercial nature . . . Only the State, and not an ordinary contract party, can decide that such sweeping changes will operate as part of the public function. Contractual breaches made in this context are far from ordinary, and may in themselves be a source of Treaty violations if they affect a right protected under the Treaty.’25 Applying the Sempra test, the central question with respect to sovereign debt restructurings involve ‘sweeping changes . . . far from the ordinary’. In the main, Argentina – as a country borrowing on a commercial basis internationally – ceased payments on its debts. The legal framework for debt issuance and debt service remained unaffected. Indeed, that framework was beyond the reach of Argentina’s police powers, given that the bonds were governed by a foreign municipal law.

Non-payment With regard to public debt, one school maintains that non-payment of sovereign debt is qualitatively different from a breach of international law: ‘If the debtor government defaults on its repayment obligations, the traditional view, founded upon State practice in the nineteenth century and in our own times, is that this conduct does not per se give rise to international responsibility.’26 ‘Non-payment in itself is no violation of international law.’27

23

24 25 26

27

Impregilo v Pakistan, para. 260; Siemens v Argentina (Award), para. 260 (distinguishing Argentina’s police powers from its position as a contracting party). Joy Mining, para. 72. Sempra v Argentina (Award), para. 311. G. White, ‘Wealth deprivation: creditor and contract claims’, in R. B. Lillich (ed.), International Law of State Responsibility to Aliens (University Press of Virginia, 1983), 165–66; see also E. Borchard, State Insolvency and Foreign Bondholders: Vol. 1, General Principles (Yale University Press, 1951), 118–20. D. P. O’Connell, International Law (London: Stevens, 1970), 998.


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In this view, the default on a sovereign debt instrument – the mere failure to pay – does not breach international law: ‘international law is only violated in case of bad faith or arbitrary discrimination’.28 The second school assimilates non-payment of debts to a violation of acquired rights.29 This question links back to the scope of protected rights discussed in Chapter 9. The (quasi)permanence of states cuts against the legality of outright cancellation (repudiation) of sovereign debt.30 Conversely, mere defaults or temporary suspensions of debt service do not engage the state’s international responsibility. If financial distress is the result of factors beyond the debtor country’s control (‘exogenous factors’), then the resulting default also does not trigger the debtor country’s responsibility. Borchard maintains that state responsibility on sovereign debt instruments presupposes a denial of justice, arbitrary or discriminatory treatment, or bad faith.31 If the debtor country discriminates against foreign creditors compared to its nationals, or discriminates across foreign creditors according to nationality, this would breach international law. Adjustment measures that affect domestic and foreign creditors equally do not trigger the defaulting state’s international responsibility. The view of the second school that every sovereign debt default, without more and independent of the debtor country’s financial condition or aggravating circumstances in the debtor country’s conduct, engenders international liability is deeply problematic, for two reasons. First, rights to repayment of debt are not property rights: rather, they are contractual entitlements. The contractual right of repayment vis-a`vis a sovereign debtor is not sufficiently crystallised to amount to an acquired right, only the existence of the repayment right as such is. When the debtor country defaults, it does not negatively affect any property: instead, the country simply fails to fulfil its contractual repayment obligation. As a result, the creditor has a contractual cause of action against the debtor country.

28 29

30 31

Borchard, State Insolvency, 15. L. Oppenheim and H. Lauterpacht, International Law: A Treatise, 8th edn (London, New York: Longmans, 1955), 309. Borchard, State Insolvency, 120. Ibid., 79–80. Cf. the Belgian and Soviet position at the Conference for the Codification of International Law, League of Nations, Bases of Discussion (1929), vol. III, 38.

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Second, virtually all states, rich and poor, small and large, have defaulted on their debt at some stage in their economic development. Many states even defaulted repeatedly.32 A rule equating every sovereign default to an international wrong is neither consonant with the necessities of international life, nor does it appear to be in conformity with state practice. With rare exceptions, such as the Serbian Loans Case, creditor governments generally do not bring international claims against defaulting countries. The view that international responsibility does not automatically follow from a contractual default finds substantial support in ICSID case law. ICSID tribunals generally refrain from qualifying a mere default as expropriation. For example, the tribunal in Waste Management v Mexico found that the City of Acapulco’s failure to pay fees due under a concession contract did not amount to indirect expropriation.33 Even though the investor had lost some of its benefits, it had at all times retained the control and use of its property. The tribunal explained: The mere non-performance of contractual obligations is not to be equated with a taking of property, nor (unless accompanied by other elements) is it tantamount to expropriation. Any private party can fail to perform its contracts, whereas nationalization and expropriation are inherently governmental acts . . . A failing enterprise is not expropriated just because debts are not paid or other contractual obligations are not fulfilled.34

In the Olguıń Case, the claimant had purchased ‘investment bonds’ (certificates of deposit endorsed by a state agency) on which the state defaulted.35 The tribunal declined to find expropriation, noting a mere business loss due to a financial crisis. The tribunal required a teleologically driven action (intent) for expropriation: ‘Expropriation therefore requires a teleologically driven action for it to occur; omissions, however egregious they may be, are not sufficient for it to take place.’36

32

33 35

See C. Dammers, ‘A brief history of sovereign defaults and rescheduling’, in D. Suratgar (ed.), Default and Rescheduling, Corporate and Sovereign Borrowers in Difficulties (London: Euromoney Publications, 1984), 77–84; B. Eichengreen and R. Portes, ‘Debt and defaults in the 1930s: causes and consequences’, in S. E. Corbridge (ed.), International Debt (London: I. B. Tauris Publishers, 1999); D. Stasavage, Public Debt and the Birth of the Democratic State: France and Great Britain, 1688–1789 (Cambridge University Press, 2003). 34 Waste Management v Mexico No. 2 (Merits). Ibid., paras. 174, 177. 36 Olguıń v Paraguay (Merits). Ibid., para. 84.


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This requirement of a teleologically driven action is unusual in ICSID case law. Schreuer notes: ‘The context suggests that the Tribunal’s point was that mere non-payment of a debt does not constitute an expropriation. It is also possible that the Tribunal meant simply that there had to be some positive action rather than a mere omission.’37 Likewise, CMS v Argentina denied the existence of expropriation since CMS had retained ‘full ownership and control’ over its shares in TGN, notwithstanding their diminished value.38 In SGS v Philippines, which concerned claims for outstanding payments, the tribunal held that ‘a mere refusal to pay a debt is not an expropriation of property, at least where remedies exist in respect of such a refusal’. Such remedies exist when there is a contractually chosen forum to hear the claims. The tribunal noted: ‘Whatever debt the Philippines may owe to SGS still exists, whatever right to interest for late payment SGS had it still has. There has been no law or decree enacted by the Philippines attempting to expropriate or annul the debt, nor any action tantamount to an expropriation.’39 In the Egyptian Workers’ Claim, the United Nations Compensation Commission found that directions by the Iraqi central bank to its commercial banks not to make deposits owed to Egyptian workers available in US dollars, contrary to longstanding practice, amounted to a taking.40 In contradistinction to SGS v Philippines and CMS v Argentina, here the exchange control restrictions by the Iraqi central bank deprived claimants of control of their deposits and left them without legal remedy against the financial institutions holding their deposits. The US–Mexican commission of 1868 determined that the failure to fulfil the obligations of a bond issued for supplies was held not to be an ‘injury to property’.41 The failure to pay the bond was not an international wrong, but merely a breach of contract. This line of cases suggests that defaults on sovereign bonds do not qualify as expropriation because they do not extinguish the creditor’s rights. There is ample authority that the mere failure to pay does not 37

38 40

41

C. Schreuer, ‘The concept of expropriation under the ECT and other investment protection treaties’, in C. Ribeiro (ed.), Investment Arbitration and The Energy Charter Treaty (Huntington, NY: Juris Publishing, 2006), 108–58, 147. 39 CMS v Argentina (Merits), paras. 263–64. SGS v Philippines, para. 161. Egyptian Workers’ Claim. The United Nations Compensation Commission was created by UNSC Res 687, 3 April 1991, UN Doc S/RES/687 to settle disputes arising out of the Iraq–Kuwait War. Manasse v Mexico.

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engage the state’s international responsibility, even if it constitutes a default under the bond. The Fedax tribunal, however, took the the opposite view. Venezuela was bound under international law to pay the promissory notes when due.42 As a general rule, non-performance of a contract, without more, is the act of parties of equal standing vis-a`-vis their creditors. Hence it does not amount to an expropriation. Feilchenfeld highlighted this crucial caveat: as international law stands to-day a debtor state commits an international delinquency by annihilating a debt entirely through repudiation, confiscation, or virtual destruction (interference with the substance of the debt), but international law has not yet reached the point where all acts causing defaults and damage to creditors give rise to legal protests based on international law.43

This principle still stands today, and finds ample support in the case law of the Foreign Claims Settlement Commission of the United States, which has dealt with a range of sovereign debt cases over the last four decades. In the Zentler v Romania case, the Foreign Claims Settlement Commission awarded a bondholder of Romania only interest.44 Principal under the External Romania Monopolies Institute 7 per cent bond was not yet due, the Commission held. Mere default on the bond did not accelerate the principal. According to the terms of the bonds, such acceleration required consent of at least 25 per cent of bondholders. The Commission declared: there was little or nothing for bondholders of this issue to gain by declaring the principal obligation accelerated, since the Government of Romania repeatedly, from 1934 on, pleaded and demonstrated its inability to meet the service on its external debt, let alone the greater amounts represented by the principal obligations thereof . . . acceleration would have been a rather meaningless gesture towards increasing any remedies which the United States national creditors may have had since there was no United States espousal of these simple debt claims and no judicial remedy with respect to the sovereign Government of Romania.45

The Commission explicitly took the government’s budget constraint into account. After noting that the purpose of the acceleration clause was to bring about collective action, the commission emphasised that 42 43

44

Fedax v Venezuela. E. H. Feilchenfeld, ‘Rights and remedies of holders of foreign bonds’, in S. E. Quindry (ed.), Bonds and Bondholders: Rights and Remedies (Chicago: Burdette Smith, 1934), 170. 45 Zentler v Romania. Ibid., 259.


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in this case ‘concerted action by a large percentage of bondholders scattered all over the world was a very remote possibility’. The drafting of the bond indicated that bondholder ‘interests would best be served after default . . . by accepting certain compromise payments which were offered’.46 Commissioner Clay disagreed vigorously. He emphasised the many impairments Romania’s bondholders suffered. Romania’s exchange restrictions left claimants without remedy. In reality, Romania was unwilling to pay. Romania’s ‘meaningless act of acknowledging the obligation’ served to preserve its bargaining position, but the government intended to do nothing more for its creditors.47 The bonds had in fact been repudiated. Coupled with the general lack of respect for private property rights and the absence of an effective forum to provide legal redress to bondholders, the acts of the Romanian government amounted to a denial of justice. The Skins Trading Corporation Commission denied compensation on unsecured debts in the absence of an annulment or repudiation. It affirmed that ‘the nationalization of a debtor company does not constitute a taking of the property of a creditor of the nationalized company, where there has been no annulment or repudiation of the debt’.48 The Commission explained that there was ‘no showing . . . that the debt which forms the res was ever annulled by the Government of Czechoslovakia so as to constitute a taking of the claimant’s property; and a mere failure . . . to pay a debt will not give rise to a compensable claim under section 404 of the Act’. The Commission emphasised the general principle that ‘[w]artime events, postwar economic conditions, foreign currency control restrictions, and chaotic conditions in general very likely played a greater role in weakening the claimant’s ability to collect the debt than did the nationalization of the debtor. Final straws are not to be equated with proximate causes.’49 The Commission referred to the legislative history of the settlement, and found that the United States and Czechoslovakia intended to conclude a lump-sum compensation settlement, without taking into account general creditor claims.50 The examination of the Act’s legislative history revealed that the limited available funds were intended as partial compensation only for 46 48

49

47 Ibid., 260. Ibid., 242. Skins Trading Corporation v Czechoslovakia. Cf. Kiang v China (no record that People’s Republic of China had ‘affirmatively repudiated’ defaulted bonds). 50 Ibid., 403. Ibid., 404.

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those claims as negotiated between the governments. The Commission relied on the following passage from the Senate Report on the Act: by limiting actions . . . to the claims of persons who have been deprived of property without just compensation . . . [there may be] no relief to persons whose claims are not based upon an actual interest [in property] . . . [since the later] action would deplete, perhaps seriously, the amounts which could be recovered by Americans whose property was nationalised by Czechoslovakia.

Following the Senate Committee, the Foreign Claims Settlement Commission emphasised the limited pool of assets available.51 This factor unambiguously excluded claims arising out of sovereign bonds. As in Skins Trading, mere non-payment of contractual retirement benefits did not amount to a taking in the absence of annulment or cancellation.52 In Tomasko, the Commission denied a claim based on nine $1,000 Czechoslovak bonds due to the lack of express repudiation.53 It noted that the debtor government had undertaken to begin negotiations with representatives of American bondholders. When these negotiations failed, claimant argued that this failure amounted to implied repudiation. The Commission reiterated that there was no repudiation, and that in any event its jurisdiction was temporally limited. The alleged failure of negotiations came after the cut-off date for its jurisdiction. The Commission expressed its sympathy with the claimant’s position, and underscored that the State Department, rather than the Commission, had responsibility for monitoring the negotiations. Mere non-payment of Austro-Hungarian gold franc bonds for which Czechoslovakia had assumed debt service via special agreement in 1925 did not trigger liability.54 Similarly, in Pietrzak v Poland, the Commission denied that mere non-payment of Polish dollar gold bonds constituted a taking in the absence of annulment or repudiation.55 It explained why non-performance of the contractual repayment obligation cannot be equated with a taking of the right to payment: Mere nonpayment of an obligation of this nature does not constitute a nationalization or other taking of property. The purchase of a bond gives rise to a debtor-creditor relationship between the issuer of the bond and the purchaser. The money with which a bond is purchased is no longer the property of the purchaser. In exchange therefore, he receives a right to payment as expressed in 51

52 54

H.R. Rep. 2227, 85th Congress, 2nd Session (1958); S. Rep. 1794, 85th Congress, 2nd Session (1958). 53 Feierabend v Czechoslovakia. Tomasko v Czechoslovakia. 55 Claus v Czechoslovakia. Pietrzak v Poland.


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the terms of the bond obligations. Nonpayment of the obligation cannot be regarded as a taking of the purchase of money, which was voluntarily given in the first instance. While the bond itself may be regarded as property, it has not been taken from the claimant. Although it may be argued that the right to payment is a form of property, the claimant’s property in this sense has not been taken from him in the absence of repudiation or cancellation of the obligation by the Government of Poland. Such has not occurred.56

The Commission also took note of an exchange of letters between the State Department and the Polish Foreign Ministry, where the latter expressed its desire to settle the bonded indebtedness by direct talks with affected bondholders. This factor influenced the decision in Poland’s favour. The Feierabend v Czechoslovakia Commission found that non-payment of contractual retirement benefits is no taking. A specific action abolishing or annulling creditor rights is required.57 However, a judgment creditor has a vested right which, if annulled by an arbitral tribunal on behalf of the debtor government, amounts to a taking.58 In Jovo Miljus, the Commission noted the traditional US position of non-espousal with respect to defaulted government bonds in support of declining jurisdiction.59 Governmental bonds were not international contracts recognised under international law. The US government customarily intervened only if there was a denial of justice or a confiscatory taking. Since Yugoslavia did not impair the bonds via legislation or otherwise and recognised their binding nature, mere default did not amount to an international wrong.60

Repudiation In contrast to mere defaults on sovereign debt, the permanent cancellation of sovereign debt instruments governed by municipal law will often breach international law.61 This is because it aims at annihilating the 56 57

58 60

61

FCSC D&A, 522. Feierabend v Czechoslovakia; Lebovic v Czechoslovakia (non-payment of pension no expropriation), Skins Trading Corporation v Czechoslovakia (creditor claims not compensable) and Universal Oil v Romania (nationalisation of debtor company, in the absence of annulment or repudiation of the debt, no taking). 59 Stipkala v Czechoslovakia. Miljus v Yugoslavia. Nash v Yugoslavia, Wolf v Yugoslavia (no international liability on bonds denominated in French or Swiss francs); Baran v Yugoslavia (dollar bonds issued by Yugoslavian municipalities); Kaufmann v Yugoslavia (pre-World War I bonds issued by Serbia and Bosnia-Herzegovina). Borchard, State Insolvency, 119.

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creditor’s claim entirely. A League of Nations Conference charged with progressive development of international law on sovereign debt in 1929 noted that a state ‘incurs responsibility if, by legislative act, it repudiates or purports to cancel debts for which it is liable’.62 Based on responses from government delegations, the Committee of Experts at the League of Nations drew a distinction between ‘repudiation pure and simple and legislation suspending or modifying the service of the debt; as regards the first, a reservation for the case of financial distress appears superfluous, since that ground could not justify final repudiation of the debt’.63 By implication, and as noted above, a suspension or adjustment of debt service does not trigger international liability. Express repudiation triggers the debtor country’s international liability.64 For instance, in the Bohadlo Case, the FCSC affirmed a taking, after Czechoslovakia had blocked payment on domestic currency bonds (koruna) in 1945 and annulled these debt obligations by decree.65 However, when the bondholder had let an opportunity to present his claims for payment pass, he could no longer obtain compensation. In Ella Wyman, a debt annulled explicitly by the Czech government was found to be compensable.66 Claims of attorneys for payment were denied.67 In the Singer Case, the commission recognised, among others, a taking of Russian treasury bills.68 In Sophia Predka, the Commission affirmed liability on Polish sovereign debt after its repudiation by the Polish government.69 The relevant passage of the 1949 decree provided: ‘In agreements concerning monetary obligations, all clauses stipulating that foreign currency or currencies alternative to Polish currency constitute a means of payment, are hereby declared null and void. The amount due in respect to obligations subject to such clauses is exclusively defined by the sum expressed in Polish currency.’70 The reach of this currency legislation extended to Polish sovereign debt denominated in foreign currency or gold. The Commission found that the option granted to bondholders to receive payment in gold ‘provided a standard of value for the very purpose of preserving the investment’ (a classic gold value clause).71 The annulment 62

63 66 68 71

Conference for the Codification of International Law under the auspices of the League of Nations: League of Nations, Bases of Discussion (1929), vol. III, 40. 64 65 Ibid., 40. Felix v Czechoslovakia. Bohadlo v Czechoslovakia. 67 Wyman v Czechoslovakia. Sanders and Niewald v Cuba. 69 70 Singer Manufacturing v Soviet Union. Predka v Poland. Decree, 27 July 1949. FCSC D&A, 528.


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of this guarantee ‘opened the door to the very hazards that the bond contract was designed to avoid’.72 This incorrect interpretation would ascribe no effect to the gold clause. The decree amounted to a taking of the bonds. However, the portion of the claim based on bonds denominated in zlotys failed, since the currency legislation did not repudiate them.73 Another bond claim which lacked a gold clause also failed.74

C. Coercion in sovereign debt restructurings Argentina’s Ley 26017, which prohibited reopening the debt restructuring and an improved offer to non-participating creditors, was a state act which may have interfered with existing contractual rights, independently of whether the default as well as other restructuring measures had been private. The question is whether Ley 26017 was incidental to the sovereign debt restructuring and served primarily as a means of enhancing the credibility of the exchange offer, or whether this legislative act aimed directly at abrogating the rights of uncooperative bondholders. Forceful restructuring measures could constitute expropriation. Repudiation of sovereign bonds would amount to expropriation, as it aims at extinguishing bondholders’ claims permanently. As the dissent noted in the Norwegian Loans Case, ‘[sovereign bonds] cannot be repudiated without giving rise to a breach of international law’.75 In the same vein, Lauder v Czech Republic affirmed that effective neutralisation of the enjoyment of the property amounts to indirect expropriation.76 In Metalclad v Mexico, the tribunal held that indirect expropriation takes place if the state’s action has ‘the effect of depriving the owner, in whole or in significant part, of the use of reasonably-to-be-expected economic benefits of property even if not necessarily to the obvious benefit of the host state’.77 The Continental Casualty tribunal explained that ‘the conditions of [the treasury bills’] restructuring in December 2004 and . . . the terms of the unilateral restructuring were by then unreasonable; notably where they implicated a waiver of all rights by the holders, who were being subjected to a substantial loss of their investment, in addition to having been previously subjected to losses due to pesification’.78

72 75 77

73 74 Ibid. Zofia Walag v Czechoslovakia. Warren Brothers v Poland. 76 Norwegian Loans Case (France v Norway), 90–91. Lauder v Czech Republic (Merits). 78 Metalclad v Mexico (Merits), para. 287. Continental Casualty v Argentina (Award), para. 264.

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All private debt restructurings – in the corporate and the sovereign context – rely to some extent on incentives to bind in creditors who consider a holdout strategy. The central question is when such incentive devices such as Ley 26017 become coercive. Feilchenfeld emphasised that: ‘As long as the debt is omitted from the budget, [virtual destruction is] not treated differently from regular complete repudiation.’79 Postponing payment indefinitely, such as a declaration or legislation never to service a particular series of bonds in the future, could constitute expropriation. Ley 26017 could have made such a declaration. However, its declaration covered not all bondholders under a series, but only those who chose not to participate in the exchange. If the law served merely as an incentive device for participation in the exchange, it might not have breached the coercion threshold. Such carrots and sticks are a routine feature of debt restructurings, in the corporate as well as the sovereign context. A bond exchange breaches the coercion threshold only when the incentive devices employed by the entity in financial distress deny any effective choice to creditors, i.e. when they are essentially forced to participate in the exchange. The bargaining position in a voluntary debt restructuring is determined by a large number of factors. In general, a country defaulting on its debts will be in a better bargaining position than a private debtor. The country’s size is an important factor. That countries enjoy great negotiating leverage does not imply that they are in a qualitatively different position from a company that proposes a bond exchange to its creditors. Major corporations such as General Motors or Siemens would be in a much stronger negotiation position than a medium-sized company. Their restructuring offers would be comparable to a state seeking to voluntarily restructure its debts. Aggressive sovereign debt exchanges could trigger BIT liability. Examples in ICSID case law on coercion are few and far between. The Pope & Talbot tribunal found that a regulatory verification which involved ‘threats and misrepresentations’ and was ‘burdensome and confrontational’ violated the fair and equitable standard.80 In Tecmed, the tribunal held that the refusal to renew the licence designed to force the investor to relocate violated the requirement of

79 80

Feilchenfeld, ‘Rights and remedies’, 205. Pope & Talbot v Canada (Damages), paras. 67–69.


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fair and equitable treatment.81 Bond exchanges are unlikely to violate the fair and equitable standard unless coercive. It would fall upon the claimant to prove elements of coercion in the exchange. As the fundamental basis of a claim of coercion in the exchange could be contractual, recourse to municipal law might be necessary. When does a sovereign bond exchange become coercive? Drawing this line is difficult. The term ‘voluntary’ requires definition. The submission to another country’s governing law and the availability of a forum abroad are relevant factors. Some recent investment awards, such as the three awards in the Suez v Argentina cases, may also be instructive.82 Cases before national courts on coercive debt restructurings may offer guidance. The leading case is Eternity v Morgan Guaranty. In that case, the US Third Circuit examined whether Argentina’s 2001 restructuring amounted to a credit event under a credit default swap (CDS) that Eternity acquired from Morgan Guaranty. Eternity brought an action for breach of contract against Morgan, alleging that the restructuring amounted to a credit event under the CDS and had therefore triggered Morgan Guaranty’s obligation to pay. The alleged restructuring event at issue was Argentina’s ‘voluntary’ restructuring in November 2001. The authorising legislation provided that: ‘The Ministry of Economy is instructed to offer on voluntary terms the possibility of exchanging Argentine government debt for Secured Loans or Secured Argentine Government Bonds.’83 Willing bondholders could exchange their obligations for new obligations, in an exchange for a lower net present value (haircut). Eternity alleged that the debt exchange amounted to a restructuring event because creditors had no choice but to participate, and that the financial press adopted that characterisation.84 The court turned to the text of the CDS contract, which incorporated the 1999 ISDA definition of the term ‘restructuring’ by reference. Such definition included an ‘obligation exchange’ as one such event, which ISDA defined by the mandatory character of the transfer. The district 81 82

83

Tecmed v Mexico (Merits). Suez v Argentina I; Suez v Argentina II; Suez v Argentina III. See also the dissents by Arbitrator Nikken. C. Trebesch, ‘The cost of aggressive sovereign debt policies: How much is the private sector affected?’, IMF Working Paper WP 09/29 (February 2009), introduces a fine-grained index of how aggressive a debt restructuring is. This approach holds promise when evaluating the coerciveness of a restructuring. 84 Presidential Decree 1387, 1 November 2001, Title II, Article 17. Ibid, 175.

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court concluded that voluntary debt restructuring was no obligation exchange, and therefore did not constitute a credit event.85 The district court reasoned as follows: Argentina’s [voluntary debt] exchange program cannot qualify as ‘mandatory’. Eternity made a choice. Along with ‘a substantial portion’ of holders of those Argentine obligations, Eternity chose to exchange the obligations for lowerinterest secured loans. . . . Despite Eternity’s attempt to argue that ‘mandatory’ should be read to encompass situations that are ‘economically coercive’ the plain meaning of the term ‘mandatory’ does not permit such a finding. The term ‘mandatory’ is defined by Black’s Law Dictionary as ‘[o]f, relating to, or constituting a command’ or ‘required’. The choice made by Eternity may have been unpalatable, but that does not make it mandatory.86

The Third Circuit disagreed with this reasoning, and found the term ‘mandatory transfer’ to be ambiguous. Looking at a dictionary definition was not enough. Reference had to be made to the meaning of the term to market practices in the derivatives industry, which the district court had failed to do.87 It found some merit in Eternity’s argument that in industry parlance, CDS protection buyers regarded as a ‘mandatory transfer’ any obligation exchange that involved economic coercion, even if the exchange was classified as ‘voluntary’ by the debtor. It made reference to Black’s Law Dictionary, which defined ‘economic coercion’ as ‘conduct that constitutes improper use of economic power to compel another to submit to the wishes of one who wields it’.88 The court concluded that ‘voluntary’ participation by ‘coerced’ bondholders appeared to resemble a ‘mandatory transfer’. It noted that Argentina’s (self-serving) characterisation did not control. The Circuit Court reversed, insofar as it concerned Eternity’s action for breach of contract, because insufficient pleadings were made on practices of the credit derivatives industry. These additional indicia were necessary to infer the parties’ intent where the contractual language was ambiguous. The question of when a sovereign debt restructuring is coercive could be an important element in evaluating whether the standard of fair and equitable treatment has been breached. The majority of more recent ICSID cases involve alleged breaches of the standard. This 85 87

86 Eternity v Morgan Guaranty (2003), 4–6. Ibid., 5 (internal citations omitted). 88 Eternity v Morgan Guaranty (2004). Black’s Law Dictionary, 7th edn (1999), 252.


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treaty obligation could be a promising avenue for bondholders, in case expropriation is to no avail. Its discussion below is only cursory. Important questions, such as the relationship to the international minimum standard of treatment, are not addressed.89

Fair and equitable treatment The fair and equitable treatment obligation is a regular feature in newer BITs. Due to its level of abstraction, the standard is surrounded by considerable fog. More than for other treatment standards, the particular circumstances of each case shape its interpretation. In this sense, it is relative. Judicial decisions which identify typical fact situations play a central role. The fair and equitable treatment standard, as developed in the case law, protects legitimate commercial expectations. In origin, the focus of the standard is on procedure. It has only gradually expanded into the substantive realm. Governmental acts need to conform to international standards of transparency, non-arbitrariness, due process and proportionality to the policy aims involved.90 The fair and equitable treatment standard could elevate nonperformance of contractual obligation to treaty breach.91 The preponderance of the limited case law suggests not. The ad hoc annulment committee in Vivendi v Argentina remarked: ‘It may be that “mere” breaches of contract, unaccompanied by bad faith or other aggravating circumstances, will rarely amount to a breach of the fair and equitable treatment standard.’92 In Waste Management the tribunal held that Acapulco did not act arbitrarily, because it found itself in a situation of genuine difficulty: ‘The persistent non-payment of debts by a municipality is not to be equated with a violation of Article 1105 [fair and equitable treatment], provided that it does not amount to an outright and unjustified repudiation of the transaction and provided that some remedy is open to the 89

90

91

C. Schreuer, ‘Fair and equitable treatment in arbitral practice’, JWI, 6 (2005), 357–86, 5–10; I. Tudor, The Fair and Equitable Treatment Standard in International Foreign Investment Law (Oxford University Press, 2008) and R. Kla¨ger, Fair and Equitable Treatment (Cambridge University Press, 2011) comprehensively survey the case law on fair and equitable treatment. M. Waibel, ‘Opening Pandora’s Box: sovereign bonds in international arbitration’, AJIL, 101 (2007), 748–54, reviews the case law on fair and equitable in relation to sovereign bonds. 92 Schreuer, ‘Fair and equitable treatment’, 24. Vivendi v Argentina, 43.

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creditor to address the problem.’93 Similarly, non-participating bondholders have the remedy of bringing suit in the municipal court. Authority also exists in the opposite direction. The tribunal in Mondev suggests that contractual breaches generally violate fair and equitable treatment.94 The SGS v Philippines decision on jurisdiction left that possibility open. In an offhand remark on the merits, the tribunal suggested that ‘an unjustified refusal to pay sums admittedly payable under an award or a contract at least raises arguable issues under Article IV [fair and equitable treatment]’.95 Given this limited authority, Schreuer explained that a simple breach of contract is part of normal business risk and does not violate fair and equitable treatment. Wilful refusal to abide by contractual obligations, abuse of government authority, and bad faith in the course of contractual performance could well lead to breach. Yet ‘a breach of contract resulting from serious difficulties on the part of the government to comply with its financial obligations cannot be equated with unfair and inequitable treatment’.96 This statement suggests that a sovereign default, provided it was motivated by serious financial difficulties, does not violate the fair and equitable standard. Even if a default on the sovereign bond does not violate fair and equitable treatment, the implementation of the sovereign debt restructuring could. Corporations in financial distress frequently use bond exchanges. This technique migrated to the sovereign context and became a generally accepted method of restructuring unsustainable debt burdens. In some respects, sovereign bond exchanges are intended to avoid breaching legal obligations under the extant bonds (or further breaches where the bond is already in default). The Argentine bond exchange in 2005 employed a common financial restructuring technique. The following paragraphs examine five types of claims under the fair and equitable standard. First, bondholders might allege that the process of elaborating the bond exchange lacked transparency, undermining their legitimate expectations.97 Transparency enables investors to adapt their business decisions in advance and comply with the investment framework. Schreuer explains that: ‘Transparency means that the legal framework 93 95 97

94 Waste Management v Mexico (No. 2), para. 115. Mondev v USA (Merits), para. 98. 96 SGS v Philippines, para. 162. Schreuer, ‘Fair and equitable treatment’, 26. Metalclad v Mexico (Merits), paras. 76 and 89 (affirming a violation of fair and equitable treatment on this ground); Maffezini v Spain, para. 83; CME v Czech Republic, para. 611; Tecmed v Mexico (Merits), para. 152.


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for the investor’s operations is readily apparent and that any decisions affecting the investor can be traced to that legal framework.’98 For sovereign bonds, such a transparency argument is unlikely to succeed. Complex exchange involving multiple bond series and several currencies and governing laws requires time to design and implement. Argentina set forth the terms and conditions of its exchange offer in detail. Even though the exchange was offered pursuant to SEC requirements, bondholders might allege that Argentina’s payment capacity remains shrouded in secrecy. In other words, the contention may be that the government has not been fully transparent about the state of its finances. Argentine bondholders are unlikely to have formed a legally protected expectation that Argentina would never carry out a sovereign debt restructuring. The country had restructured its external debt on several occasions in the past. The same applies to many middle-income countries, in Latin America and elsewhere. Moreover, Argentina never made contrary assurances that it would not seek to restructure its debts in the wake of a sovereign debt default which could have led to the formation of such reasonable expectations. Second, bondholders could take the view that the take-it-or-leave-it exchange offer violated due process. They might assert that Argentina did not hear their concerns prior to the elaboration of the final proposal. They could argue that the government adopted a confrontational attitude and did not engage in serious restructuring negotiations. Instead, Argentina, arguably, opted for unilateral action. A violation of due process requires disappointing investors’ legitimate expectations with respect to the restructuring. A government which has at least attempted to consensually restructure its debt obligations in good faith with a majority of bondholders is likely to fulfil such expectations. An obligation to engage in potentially lengthy renegotiations when agreement is likely to be elusive and when anonymous bondholders are widely dispersed could be unduly burdensome on governments in financial distress. Third, was the restructuring itself carried out in good faith? While the bona fide principle is well recognised in international law, assessing whether a specific debt restructuring was carried out in good faith, given the economic circumstances at the time, is complex and requires a detailed examination of the country’s payment capacity. A tribunal 98

Schreuer, ‘Fair and equitable treatment’, 20.

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could not evade the responsibility of answering this question. Bondholders would need to demonstrate bad faith of the government in carrying out the restructuring. Bondholders bear the burden of proving that unwillingness to pay prompted the restructuring. Fourth, could bondholders assert a profound transformation of the ` la CMS? It requires logical gymnastics to be able business environment a to speak of a ‘business environment’ for sovereign bonds.99 The only conceivable business environment is the entire national economy. To guarantee the stability of this business environment would amount to an impossible promise. Sovereign bonds are general purpose financial instruments, a voluntary alternative to taxation for the use of the public treasury. Sovereign bonds are free-standing. They do not exist in a business environment. Fifth, how about allegations that the restructuring undermines the legal framework of the sovereign bonds? The legal framework for the typical commercial sovereign bond is a third country’s municipal law. Over this framework, the debtor country has no control. The law applicable to the bond is outside its reach and remains unchanged. It is difficult to think of restructuring measures which affect the stability of the legal framework directly. Does Ley 26017 sufficiently affect that legal framework? Encouraging participation in the exchange might well be the primary motivation. In this case, the law would serve as a commitment device, underpinning the promise that the first offer would be the final one. Without the law, the exchange might have failed to achieve a high level of bondholder participation. This could indicate that the measure was proportionate to the policy aim involved. Ley 26017 could undermine the legal framework and violate the fair and equitable standard if it intentionally abrogated the rights of non-participating bondholders.

D. Summary Fair and equitable treatment requires appreciating a large number of factual elements. A central aspect is that sovereign debt exchanges serve as a partial substitute for the lack of a statutory sovereign debt restructuring mechanism. Unlike a corporation, bond exchanges are the only 99

This is not surprising, given the discussion in ch. 10.D(e) above on why sovereign bonds are unlikely to qualify as ‘investment’ for lack of association with a commercial undertaking.


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viable method for a country to restructure an unsustainable debt burden. Incentive features are often critical to the success of bond exchanges. They partially substitute for ‘cramdown’ powers in insolvency (but without giving the debtor country de facto cramdown powers), which are an accepted feature in many municipal laws. Unless the restructuring manifestly discriminates against a non-participating minority, ICSID tribunals ought to leave considerable leeway to countries in designing their sovereign debt restructurings. While fair and equitable treatment is a legal principle, the plain meaning of the standard leaves considerable discretion to arbitrators to consider equity. It is a unique treatment standard in that it allows tribunals to perform a comprehensive judicial balancing of investors’ and host states’ legally protected interests. For sovereign debt instruments in default, there is scope to deny liability, if otherwise a sovereign debt restructuring using commonly accepted techniques is seriously prejudiced. An alternative is to limit the quantum of liability if the country is incapable of repaying all its sovereign bonds.

13

Compensation on sovereign debt

This chapter sets out which creditor losses are recoverable as a matter of principle through investment arbitration, and explains why the quantum due on sovereign debt will generally be only partial compensation. Appropriate compensation could lie substantially below the debt’s face value. This is because the legally protected expectation under the four treatment standards examined in the previous chapter is unlikely to correspond to the debt’s full face value.

A. International law’s philosophy of creditor protection Non-compensable risks in investment arbitration International courts and tribunals have repeatedly stressed that property rights and investment protection are ‘no insurance against ordinary commercial risks’.1 In the words of the Maffezini and CMS tribunals: ‘BITs are not insurance policies against bad business judgments.’2 The Saluka Tribunal, noting the ‘serious risks to investing in IPB [a Czech bank]’, declined to find expropriation.3 In Starrett Housing, the Iran–US Claims Tribunal explained that ‘investors in Iran, like investors in all other countries, have to assume the risk that the country might experience strikes, lockouts, disturbances, changes of the economic and political system and even 1

2

3

A. Reinisch, ‘Expropriation’, in C. Schreuer et al. (eds.), The Oxford Handbook of International Investment Law (Oxford University Press, 2008) 25. Malaysian Historical Salvors v Malaysia (Merits), para. 111 (salvage contract on a ‘no-finds-no-pay’ basis involves only ordinary commercial risk). Maffezini v Spain (Merits), para. 64; CMS v Argentina (Jurisdiction) para. 29; CMS v Argentina (Merits), para. 244. Saluka v Czech Republic, paras. 55, 275; Generation Ukraine v Ukraine (Merits), paras. 20, 37.

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revolutions . . . A revolution does not as such entitle investors to compensation under international law.’4

International law does not insure against default risk Similar considerations apply to sovereign debt crises. BIT protection is no insurance device against default risk on sovereign debt instruments. For purposes of ICSID arbitration, the purchaser buys with notice of the risks of default, weighing the probabilities of large profits against the danger of a full or partial loss of principal and interest. Creditors have no assurances that they will be paid in all states of the world. Seventy-five years ago, Feilchenfeld succinctly captured the philosophy of bondholder protection under international law: ‘Generally speaking, it might be said that international law will guarantee to the creditor the existence of debt and of a debtor, but not the existence of a good debt or a rich debtor.’5 This time-honoured principle still stands. Sovereign creditors will continue to bear the risk of deteriorating creditworthiness, independent of the progressive development of international law in matters of public debt. Even carefree investors cannot fail to notice the missing efficacy in the legal protection for holders of sovereign bonds. This caveat applies a fortiori to sophisticated institutional investors. Bond prospectuses contain detailed disclaimers on risk factors. The high interest rates payable on bonds issued by some countries also indicate that the bond purchases involve substantial risks. Default risk on a bond is different from the risk sharing that is typical of investments within Article 25 of the ICSID Convention.6 The default risks of the bond may – and should indeed – be held against the purchaser of debt securities in most cases. Realistic expectations on debt instruments trade off high risk against high return. If courts and international tribunals judicially cured this fundamental deficiency in creditor protection ex post, lender moral hazard would arise.7 In purchases of all sovereign debt instruments, and particularly of so-called emerging countries, there is invariably a not insignificant risk of non-payment. High interest rates reflect that risk. As governments 4 5 6 7

Starrett Housing v Iran (Interlocutory Award), 156. E. H. Feilchenfeld, Public Debt and State Succession (New York: Macmillan, 1931), 657. On the sharing of commercial risk, see ch. 10. D(c) above. See the definition of that term at p. 25 above.

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have long recognised, routine official intervention, including by courts, may create moral hazard.

Protection of legitimate expectations There is a risk that lenders start paying too little attention to the creditworthiness of their sovereign borrowers. When ICSID tribunals effectively guarantee repayment of sovereign bonds ex post, even for those with high default risk ex ante, creditors might be expected to become less careful. They might lend indiscriminately, and lend too much. ICSID awards ought not to affect the relative risk properties of various sovereign bonds. International investment law protects against frustration of legitimate expectations.8 The tribunal in RFCC v Morocco emphasised that the investor can only be compensated for advantages that are the subject of legitimate expectation: ‘effets substantiels d’une intensite´ certaine qui re´duisent et/ou font disparaıˆtre les beńe´fices le´gitimement attendus de l’exploitation des droits objets de ladite mesure a` un point tel qu’ils rendent la de´tention de ces droits inutile’.9 In Biwater Gauff, the tribunal rejected Tanzania’s argument that Biwater Gauff had invested in the project only as a ‘loss leader’ with a low rate of return in the hope of securing other profitable opportunities later. The tribunal refused to draw any link between a party’s motives for entering into an investment and its ability to qualify for protection under the ICSID regime. In a similar vein, the Saluka tribunal underscored that ‘[the investor’s] expectations, in order for them to be protected, must rise to the level of legitimacy and reasonableness in light of the circumstances’.10 The tribunal in Olguıń v Paraguay provided the rationale for this limitation: ‘[Mr. Olguıń] had his reasons (which this Tribunal makes no attempt to judge) for investing in that country, but it is not reasonable for him to seek compensation for the losses he suffered on making a speculative, or at best, a not very prudent, investment.’11 Favourable macroeconomic conditions are transient, particularly in developing countries, and subject to inevitable swings in market value. Echoing the Oscar Chinn Case, bondholders, like other creditors, cannot expect to be isolated from financial crises and subsequent sovereign 8

9 11

E. Borchard, ‘International loans and international law’, ASIL Proc, 26 (1932), 135, 161 (‘legal liability is the sanction for defeated expectations in law’). 10 RFCC v Morocco (Merits), para. 67. Saluka v Czech Republic, paras. 302–04. Olguıń v Paraguay, para. 65.


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debt restructurings. In that case, the PCIJ famously held: ‘Favourable business conditions and goodwill are transient circumstances, subject to inevitable changes.’12 Favourable macroeconomic conditions in developing countries are similarly – if not more – transient than business conditions in the developed world. Reasonable creditors would have contemplated a full range of possible states around the world. In some, they are going to pocket a sizable profit; in others a small loss; and in some, substantial or even total loss. It is sovereign creditors who bear the risk of deteriorating sovereign creditworthiness.

B. Partial compensation Even if sovereign bonds were protected as acquired rights under international law, it is by no means certain that bondholders would necessarily be entitled to the full face amount in compensation. BITs generally prescribe ‘prompt, adequate and effective’ compensation (the ‘Hull formula’).13 According to the Chorzo´w principle, compensation is due so as to repair all the consequences of the illegal act and re-establish the situation which in all possibility would have existed in the absence of a treaty breach.14 Yet peculiarities of traded sovereign debt might warrant a departure from this principle. Judge Hersch Lauterpacht supported partial compensation for expropriation in exceptional circumstances. The general obligation to respect alien property is subject to an important caveat: fundamental changes in the political system and economic structure of the state or far-reaching social reforms entail interference, on a large scale, with private property. In such cases neither the principle of absolute respect for alien private property nor rigid equality with the disposed nationals offers a satisfactory solution of the difficulty. It is probable that, consistently with legal principle, such solution must be sought in the granting of partial compensation.15

12 13

14

15

Oscar Chinn Case (UK v Belgium), 88. The Hull formula: see M. Sornarajah, The International Law on Foreign Investment, 2nd edn (Cambridge University Press, 2004), 242–46. Cf. also AGIP v Congo (Award) (1979) and LETCO v Liberia (Merits). Adequacy refers to ‘fair market value’: see I. Marboe, ‘Compensation and damages in international law’, JWI, 7 (2007), 723–60. L. Oppenheim and H. Lauterpacht, International Law: A Treatise, 5th edn (London, New York: Longmans, 1935), vol. 1, para. 155, n.2. This passage remained unchanged through to the 8th edition in 1955, the last that Lauterpacht edited.

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The ECHR in the James Case similarly pronounced that the standard for compensation is not always fair market value: the taking of property without payment of an amount reasonably related to its value would normally constitute a disproportionate interference which could not be justifiable under Article 1. Article 1 does not, however, guarantee a right to full compensation in all circumstances. Legitimate objectives of ‘public interest’, such as pursued in measures of economic reform or measures designed to achieve greater social justice, may call for less than reimbursement of the full market value. Furthermore, the Court’s power of review is limited to ascertaining whether the choice of compensation terms falls outside the State’s wide margin of appreciation in this domain.16

In Lithgow, the European Commission took the view that state practice on compensation diverged widely. Counsel for the European Commission stated that he was ‘not aware of a single case where, for nationalisations of whole industries, full compensation was paid by the nationalising state to the foreign owners, without special investment treaties being applicable. In most cases of nationalisation, lump-sum agreements were reached clearly below the value of the assets taken. At least for large scale nationalisation, the notion of sovereignty over natural resources and freedom of decision over the economic order may easily come into conflict with a claim of full compensation.’17

State practice on compensation for sovereign defaults In state practice, partial compensation for expropriation was widespread in the decades following World War II.18 Lump-sum compensation became ‘an increasingly accepted method of resolving’ sovereign bond disputes in particular.19 The expropriating state agreed to pay a fixed sum to the investors’ country of nationality, which would distribute this fixed pool pro rata.20 The lump sum has typically been much lower than the claims in aggregate. Post-war compensations ‘could 16 18 19

20

17 James v UK, para. 54. Quoted in Lithgow v United Kingdom, 329. A. F. Lowenfeld, International Economic Law (Oxford University Press, 2002), 405–07. R. Lillich, ‘International claims: their settlement by lump sum agreements’, in P. Sanders (ed.), International Arbitration: Liber Amicorum for Martin Domke (The Hague: M. Nijhoff, 1967) 192. R. Lillich and B. Weston, International Claims: Their Settlement by Lump Sum Agreements (University of Virginia Press, 1975), 11 (‘a cluster of diplomatic decisions addressed usually to private pecuniary claims’); Lillich, ‘International claims’; E. Re, ‘The Foreign Claims Settlement Commission and the adjudication of international claims’, AJIL, 56 (1962), 728.


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rarely be fitted into the Hull formula or anything close to it’.21 Lillich concludes that the substantial post-World War II practice on lump sum settlements including sovereign debt significantly weakened the longstanding principle that claims arising out of sovereign bonds are merely financial, not international claims.22 For instance, in exchange for a series of property confiscations at the beginning of the twentieth century, Mexico paid a lump sum of $40 million ($4.5 billion, $470 million) under a 1941 agreement in several instalments to settle all claims.23 US Secretary of State Hull recognised that the case of Mexico’s financial difficulties raised the fundamental question whether a government was ‘relieved of its obligations under universally recognised principles of international law merely because its financial or economic situation makes compliance therewith difficult’.24 Compensation can be partial by agreement of the (state) parties concerned. In general, debtor states have no right to a waiver of full compensation.25 In the context of reparations, Van Houtte notes that ‘the responsible State’s incapacity to pay full reparation may go beyond the limits of what a State’s economy can bear and would harshly sanction the State’s population’.26 As a general rule, state practice points to a hierarchy of creditor claims in international law, depending on the sums available for satisfaction of creditor claims. Some categories of claimants, such as those having personal injury or those whose rights in rem have been expropriated, appear more worthy of protection than others. By contrast, those with pure money claims, such as a general unsecured creditor or a bondholder, rank lower in the hierarchy of priorities.

C. Speculation and partial compensation The characterisation of sovereign debt instruments as ‘speculation’ is a recurrent theme in decisions by international courts and tribunals. The noted economic historian Platt emphasised that sovereign creditors in

21 23 24

25

26

22 Lowenfeld, International Economic Law, 406. Lillich, ‘International claims’, 194. US Department of State Bulletin, 5 (22 November 1941), 399–402. US Secretary of State to Mexican Ambassador, 22 August 1938, cited from Lowenfeld, International Economic Law, 399. H. Van Houtte et al., Post-War Restoration of Property Rights under International Law (Cambridge University Press, 2008), vol. 1, 304. Ibid., 305.

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the nineteenth century could not expect their government to act as insurer for what were, in essence, gambling losses.27 The Oxford English Dictionary juxtaposes ‘investment’ and ‘speculation’. ‘Investment’ refers to the ‘conversion of money or circulating capital into some species of property from which an income or profit is expected to be derived in the ordinary course of business or trade’. With ‘speculation’, by contrast, the ‘object is the chance of reaping a rapid advantage by a sudden rise in the market price of something which is bought merely in order to be held till it can be thus advantageously sold again’.28 In the Kearney Case before the US–Mexican General Claims Commission, the umpire held in a similar spirit: He [the claimant] entered into the contract of his own accord, fully aware of the condition of the Republic of Mexico and of its ability or otherwise to pay its debts, and trusted to the good faith of the Mexican government.29

The bondholder enters the contract voluntarily, contemplating the upside and downside risks. Earlier authority from mixed commissions suggests that speculation would not fall under their jurisdiction. The Chase Case treated a loan as a ‘speculation’ and dismissed the claim. The commission in the Tausig Case held that to find an injury to property would encourage ‘extravagant speculation’ as the claimant had bought bonds with intention to resell to Mexico.30 In Africa Holding, the tribunal explained that ‘the most foreseeable profit for [claimants] is speculation on the spread between the buying and the selling price’.31 The US Statement of Interest in the CIBC Bank Case – an important instance of litigation by a non-participating creditor in US courts – came close to suggesting such a standard of compensation in a municipal sovereign debt case: ‘[Sovereign] debt obligations have two values: the original legal contract value and the generally recognized market value.’ While the US government stopped short of suggesting that nonparticipating creditors, who had purchased their bonds at a 55 per cent discount, should only be able to recover the debt’s secondary market value and not the full outstanding face value of the bonds, the Statement of Interest notes that ‘certain creditors – like Dart . . . may seek 27

28 29

D. C. M. Platt, Finance, Trade, and Politics in British Foreign Policy, 1815–1914 (Oxford: Clarendon Press, 1968), 35–53. Oxford English Dictionary, 2nd edn (Oxford University Press, 1989). 30 31 Kearney v Mexico, 73. Taussig Case. Africa Holding v DRC, para. 80.


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through litigation to benefit from voluntary debt reduction previously agreed to by the commercial banks . . . rather than negotiate a restructuring with the debtor in the orderly manner that is consistent with US foreign policy and evidenced in the Brady plans’.32 The dissent by Commissioner Andrade in Aspinwall called ‘a total departure from justice’ the fact that the majority awarded the face value of the Colombian bonds and interest, despite the fact that the bonds were never sold for more than 42 per cent of the face value. In the dissenting view, this was their ‘actual price’.33 Furthermore, the Aspinwall dissent disputed jurisdiction on the grounds that the bonds did not belong to US citizens at issuance. Rather, ‘they could not have come into the possession thereof but by purchases in the market in the way of speculation’.34 In Howland v Venezuela, Commissioner Andrade in his dissenting opinion also noted that the bonds had never traded at more than 42 per cent of their nominal value; many other holders had consented to a restructuring at 33⅓ per cent. He also explained that Howland had acquired domestic debt of Colombia that was never offered for sale outside of Colombia.35 They must have been acquired ‘in the open market, in the way of speculation’. To accord the debt’s full nominal value was a fundamental departure from justice.36 Likewise, the Ballistini tribunal emphasised that: It is a principle of public international law that the internal debt of a state, classified as public debt, which is subject to speculation current amongst that sort of values, which are acquired freely and spontaneously at very different rates of quotations which mark great fluctuations of their rise and fall, can never be subject of international claims in order to obtain their immediate repayment in cash.37

Whether a particular bondholder did in fact know about the real possibilities of performance is a matter in equity, not in law. International investment law does not single out inexperienced investors for special protection. It cannot perform the function of highly developed domestic consumer protection laws. It protects solely against violations of international law. Investor protection is a matter for domestic securities law. 32 33 35 36

37

The US Statement of Interest in CIBC v Banco Central do Brasil (1995). 34 Aspinwall (USA v Venezuela), 3660. Ibid. Moore, Arbitrations, vol. 4, 3636, 3654, 3662. Moore, Arbitrations, vol. 4, 3664; G. Watrin, Essai de construction d’un contentieux international des dettes publiques (Paris: Sirey, 1929), 218–21. Ballistini (France v Venezuela).

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If they received improper advice, bondholders may also have claims against financial intermediaries. Italian and German bondholders, in a series of cases in Italian and German municipal courts, obtained compensation for improper advice.38 In First National v Soviet Union, the US Foreign Compensation Commission affirmed the Soviet Union’s liability in principle for repudiation of its governmental bonds. These bonds included, among others, dollar treasury notes and loans of Russia’s provisional government, contracted in New York, as well as Imperial Russian rouble bonds. However, in the crucial determination on quantum, it limited compensation to ‘actual consideration last paid therefor’.39 The Soviet government had explicitly repudiated all bonds issued or guaranteed by its predecessors in a decree published on 10 February 1918. The relevant exchange rate for measuring compensation was the rouble exchange rate on the date of the repudiation. First National sought payment of $39 million ($2 billion, $294 million) under Section 305 of the International Claims Settlement Act of 1949. The limited compensation derived from the Act’s Section 307, which provided that the amount of any award based on a claim of a United States national other than the one to whom the claim originally accrued ‘shall not exceed the amount of the actual consideration paid therefor either prior to 1 January 1953, or between that date and the filing of the claim, whichever is less’. This provision became crucial for repudiated Imperial bonds, which often traded at heavy discounts (up to 95 per cent). Recovery was as a result far below face value. On dollar treasury notes amounting to $7 million, the commission awarded only $1.2 million. Why did it award far less than the face value? The reason is that First National held only $435,000 prior to the repudiation. After the Soviet repudiation, the bank purchased additional bonds with principal amounting to $6.5 million for $850,000 on the secondary market. The commission limited recovery for both bond purchases to the actual consideration paid to the original holder. Likewise, the commission reduced compensation on rouble bonds acquired after the

38

39

LG Frankfurt am Main (2004); S. Bartole, ‘State immunity and the protection of private investors: the Argentine Bonds Case before Italian courts’, IYBIL (2006) 16, 165–85. First National City Bank of New York v Soviet Union; Lacey v Cuba (heir of Cuban dollar bond limited to recovery of actual consideration paid); Dauphinot v Cuba.


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repudiation under Section 307 of the Act. With regard to the Imperial 5.5 per cent war loan bond, the commission declined First National’s interest claim, as the plaintiff failed to establish that the interest coupons had not already been paid, as evidenced by the absence of punch marks. The principal amount of Imperial Russian 5.5 per cent dollar bonds issued in 1916 was $1.26 million. Prior to 10 February 1918, First National purchased $275,000 whereas it acquired debt with face value of $951,000 after the repudiation for $90,000. The commission awarded $365,000 in principal plus interest. Of the 6.5 per cent three-year credit obligations of the Imperial government due in 1919, the bank held a total of $1.1 million, of which only $483,000 predated the repudiation. The commission awarded $548,000 in principal plus interest. National City Bank obtained only $5 million on an initial claim of $39 million. In a similar case, the commission even established a presumption against the claimant.40 In Helen Modell, the commission used the twoyear average cost on the secondary market, 6.25 in 1938 and 4.06 in 1939, to infer ‘actual consideration’ in the absence of evidence on consideration paid by the claimant.41 In Campbell, Cage, Jelleret and Court & Borde, Venezuela refused to pay on various sovereign debts. Arbitrator Sturup declared that a debt could not be annulled at the debtor’s own behest. He affirmed the payment obligation in principle, though he reduced the debtor’s obligations considerably.42 In Campbell, he reduced the principal by 75 per cent and interest from 6 per cent to 3 per cent, and to 5 per cent in Cage. The holders received only 25 per cent because that was the bond’s current market price in London. In Jelleret the arbitrator awarded the claimant full principal and interest. By contrast, the holders of Venezuelan debt (MM. Court et Borde) only received half of their claim.43 The arbitrator took into account that Venezuela needed to maintain public order and provide essential public services to guarantee a certain standard of living for its people. Taking this payment constraint into account was also in the best interest of creditors, who relied on stable

40 42

43

41 McCord v Soviet Union. Modell v Soviet Union. A. de Lapradelle and N. Politis, Recueil des arbitrages internationaux (Paris: Pedone, 1905–1954), vol. 2, 552ff, 557, 541. Watrin, Essai de construction, 202–03.

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tax revenues for the repayment of their debt.44 He took into account a debt restructuring agreement between Denmark on behalf of its creditors and Venezuela,45 which fixed repayment at 50 per cent. Incidentally, as chief negotiator for Denmark of that agreement, he was deeply familiar with Venezuela’s capacity to pay. The British commissioner, by contrast, argued that such a debt restructuring agreement by the debtor government with a third party was immaterial.46 Why did the arbitrator render different awards in the four cases? Campbell was owed money on a sales contract, whereas Cage had subscribed to a loan. Jelleret’s claim arose from a forcible requisition by the military.47 Court and Borde acquired their bonds on the secondary market for less than their nominal value. Gaston Je`ze also regarded a state’s payment capacity as a limit on how far creditors could enforce their claims against defaulting states: C’est en effet une re`gle certaine du droit international financier qu’un Etat est autorise´ et le´gitime´ a` suspendre le service de sa Dette Publique, dans la mesure ` le service inte´gral compromettrait le bon fonctionnement de ses services ou publics essentiels. Il est e´vident en effet que pour payer inte´gralement ses creánciers, un gouvernement ne va pas arreˆter le service de la de´fense nationale, de la police ou de la justice . . . Il est admis que les Tribunaux internationaux ont le droit, en prononçant la condamnation, de tenir compte de la capacite´ de paiement de l’Etat de´biteur, c’est-a`-dire de de´finir les services publics essentiels, et la mesure de leur bon fonctionnement pour l’Etat conside´re´.48

The question addressed in the next section is whether international law draws a distinction between the initial creditor and the assignee.

D. Assignment of sovereign debt Assignment denotes the transfer to a purchaser (assignee) of the rights of the seller (assignor) against an obligor (debtor) with respect to the extension of credit. To the extent of the assignment, a direct creditor-debtor 44 45 46 47

48

G. Je`ze, Journal des Finances, 2 August 1929, 722. Convention between Denmark and Venezuela, 17 March 1866. Lapradelle and Politis, Recueil des arbitrages, vol. 2, 541. Lapradelle and Politis, Recueil des arbitrages, vol. 2, 554 (‘l’ideé dont [l’arbitre] s’inspire cadre avec la theórie indiqueé preće´demment sur les charges de l’Etat emprunteur et paraıˆt en harmonie avec la doctrine selon laquelle le nouvel Etat n’est tenu des obligations patrimoniales de son pre´decesseurs que dans une mesure correspondant a` la valeur totale des biens et des faculte´s par lui recueillis de l’Etat disparu’). ´tat’, Recueil des cours (1925), 155–236, 178. G. Je`ze, ‘La Garantie des emprunts publics d’E


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relationship that existed previously between assignor and debtor is created between assignee and debtor. Contractual rights, such as the right to repayment on monies advanced, are a form of intangible property, known to the old common law as ‘choses in action’. The old rule was that choses in action could not be assigned. The debtor’s obligation to repay was thought to run only personally to the creditor. To allow assignments of such loans was seen to encourage litigation.49 Modern law reversed this position. The general rule is now very liberal on the assignment of contract rights, reflecting a general distaste for restraints on alienability.50 In the absence of express and unambiguous restrictions on assignment in the debt instrument, the position under English law, as well as New York law – the two domestic laws that most commonly govern sovereign lending – is that contractual claims are freely assignable. As a general rule, borrowers need not be notified of the assignment. The assignability of contractual rights may be restricted by operation of statute on compelling public policy grounds.51 Assignments are governed exclusively by the law governing the loan. Even for inter-state debt governed by public international law, no customary rule that such debts may not be assigned is discernible. If anything, market practice points in the opposite direction. Debtor states whose inter-state debts have been assigned have not argued that public international law prohibits such assignment, even though they sometimes protest in strong terms that such practice undermines good intergovernmental financial relations. No opinio iuris exists. The IMF cannot assign interests in its lending portfolio. The position is less certain for the World Bank and other multilateral development banks. Contractual restrictions on assignments in international lending agreements take a number of forms: only assignments above a minimum amount, assignments only to other banks or financial institutions, notifications requirements, or wholesale prohibitions on assignment.

49 50

51

G. Treitel, The Law of Contract, 6th edn (London: Sweet & Maxwell, 1983), 493. L. Buchheit, ‘Legal aspects of assignments of interests in commercial bank loans’, in J. Lederman (ed.), The Commercial Loan Resale Market (New York: Probus Professional, 1991), 446, 448. E.g. the US Restatement (Second) on Contracts, } 317 (b) provides for the invalidity of assignments ‘where the assignment is forbidden by statute or is otherwise inoperative on grounds of public policy’.

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It used to be considered bad form for a Paris Club creditor to assign an interest in its restructured loan to a commercial party. The Club feared that any such assignments would make any future restructurings difficult, if not impossible. To trade debt to secondary market creditors was considered detrimental for policy reasons. For a long time, the assumption has been that debt owed by one country to another was less of a litigation risk. Countries relied on the Paris Club to enforce this informal rule. Periodically, however, sovereign creditors that are themselves facing financial difficulties are tempted to monetise those debts. Over the last decade in particular, some members of the Paris Club defected from this gentleman’s agreement and began selling subparticipations and other interests in official bilateral debt in order to circumvent the non-assignment policy. This informal rule had begun to loosen up in the 1990s, to the point where it is doubtful today that there is a clear-cut informal rule against assignment. On occasion, the Paris Club has held informal discussions whether its members would condone one of its members selling debt to a commercial entity. In the following paragraphs a few historical examples are given of assignments of sovereign debt. When creditor governments created the administrative Council of the Ottoman Debt to oversee the Ottoman Empire’s finances and exercise oversight on behalf of foreign bondholders, the Ottoman Government assigned its claims against Bulgaria, Greece, Serbia, Montenegro and Eastern Roumelia to the administrative Council. This is an early example of an assignment of inter-state debt to an independent entity, though in respect of territories over which the Ottoman Empire exercised suzerainty.52 The claim of Gibbs on an assigned Colombian bond against New Granada came to the 1857 and 1864 Colombian–US mixed commission.53 The 1857 commission upheld the claim. However, the United States brought the claim to the 1864 commission, without paying the 1857 award from funds provided by Colombia. Gibbs protested and maintained that his claim was res adjudicata which must be paid by the US Government – a proposition that Attorney General Harmon agreed with.54

52 53

54

G. Scelle, ‘Bulgarian independence’, 6 (1912) AJIL, 659–78, 655. Moore, Arbitrations, vol. 2, 1398, 140; E. Borchard, State Insolvency and Foreign Bondholders: Vol. 1, General Principles (Yale University Press, 1951), 266, note 210. Q. Wright, ‘The legal nature of treaties’, AJIL, 10 (1916), 706–36, 732, n. 112.


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In Keller v Mexico, the Mexico–US claims commission affirmed jurisdiction over a stolen bond, because there had been fraudulent destruction of a specific property with a definite value.55 In 2004, Germany sold a beneficial interest of 5 billion euros to a special purpose vehicle called Aires that sold bonds backed by Russian debt. The origin of the debt lay in commercial credits and loans incurred by the former Soviet Union. Germany decided to monetise 5 billion euros in Russian debt to comply with the Maastricht deficit rules. After Russia objected strenuously, Germany promised no further assignments for the duration of the Paris Club talks. When Russia wanted to pre-pay its Paris Club debt in 2004, Germany faced the risk of having to foot the bill for the higher interest payments on the Aires bonds itself. With respect to HIPC countries, Paris Club members, EU members and the signatories to the United Nation’s Doha Declaration on Financing for Development have committed informally not to assign debt claims: We are deeply concerned about increasing vulture fund litigation. In this respect, we welcome recent steps taken to prevent aggressive litigation against HIPC eligible countries, including through the enhancement of debt buy-back mechanisms and the provision of technical assistance and legal support, as appropriate, by the Bretton Woods institutions and the multilateral development banks. We call on creditors not to sell claims on HIPC to creditors that do not participate adequately in the debt relief efforts.56

Assignment in ICSID arbitration In ICSID arbitration, there is only limited authority for distinguishing the initial creditor from the assignee.57 Those who drafted the ICSID Convention did not conceive of modern financial instruments, which are routinely traded. Even though the ICSID Convention leaves open the question of duration, it is widely recognised that ICSID lacks jurisdiction over short-term financial flows.58 Fedax arguably takes an overly restrictive of such ‘volatile capital’, while leaving that term undefined.59 With respect to the qualification as investment of negotiable instruments, Douglas focuses on ‘the nexus between the funds transferred for consideration for the negotiable instrument and the employment of 55 56 58

59

Keller v Mexico (US v Mexico); cf. also Eldredge v Peru (US v Peru). 57 Doha Declaration, para. 60. Fakes v Turkey (Award), para. 84. G. Delaume, ‘ICSID and the transnational financial community’, ICSID Review – Foreign Investment Law Journal, 1 (1986), 242. Fedax v Venezuela, paras. 42–43.

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those funds for commercial purposes of the host state. At the one end of the spectrum, it seems clear that trading on the short-term money market in negotiable certificates of deposit or treasury and commercial bills cannot constitute an investment because this nexus is too weak.’ Douglas concludes that assignments to another creditor will rarely amount to an investment.60 Article 25 of the ICSID Convention is sometimes taken to indicate that the assignee may bring an arbitration claim after acquiring an investment made by another, because the assignment constitutes a new investment. According to this view, if the initial transaction qualified as an investment, then the assignee would automatically step into the shoes of the assignor, even though the assignment does not fulfil the requirements of an investment. Fedax appears to lean in the direction that a separate qualification of the assignment as an ‘investment’ is unnecessary. However, the better view is that the assignment must qualify as an investment in its own right to give rise to an investment claim. There is only limited authority in international law for distinguishing the initial creditor from the assignee for enforcement purposes. In part, this limited practice is explained by the fact that the secondary market in sovereign debt began to develop in earnest only in the mid1980s with the wave of defaults in Latin America and the attempts by banks to on-sell their debt to willing buyers at often steep discounts. This was also the first time that banks sold parts of their sovereign loan portfolio to non-bank investors as part of a wholesale asset disposition programme.

E.

Compensation on secondary market purchases of debt

This section sharpens the argument that the appropriate standard of compensation for debt instruments traded on the secondary market in default is the ‘generally recognised market value’ or ‘fair market value’. The World Bank Guidelines on determining fair market value suggest that for bonds the book value should be deemed a reasonable replacement value.61 This value will typically diverge from the bond’s face value. This argument is buttressed by recourse to the private law 60

61

Z. Douglas, The International Law of Investment Claims (Cambridge University Press, 2009), Rule 23, 180–81. The World Bank Guidelines on Foreign Investment (1993), 31 ILM, 21 September 1992, 1363–83.


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principle of unjust enrichment, as a guide to the appropriate level of compensation.62 How does one calculate this generally recognised market value?

Compensation net of default risk In this respect, Sturzenegger and Zettelmeyer’s idea of using the net present value of the old debt after a restructuring, discounted by the yield implicit in the market value of the new debt, offers promise.63 While they propose this technique for calculating investor losses in sovereign debt restructurings, this method is equally useful for awarding damages to secondary market purchasers of sovereign debt instruments. One desirable property of this compensation technique is that it nets default risk out of compensation due to sovereign investors. The rationale behind this method of calculating compensation is to treat non-participating creditors as if their bonds had the same probability of repayment as new bonds. This is critical in order to ensure that international investment law does not guarantee repayment of sovereign bonds independent of the country’s creditworthiness. Nonparticipating creditors are exposed to the same default risk as participating creditors. Under this approach to computing compensation, non-participating bondholders would not be compensated for the portion of their loss, relative to face value, which is due to default. Crucially, this risk is also borne by participating bondholders.

Partial compensation to encourage collective action Non-participating bondholders would, however, be compensated for losses due to discrimination. Non-participating creditors would also benefit from debt relief provided by participating bondholders. For this reason, this measure of compensation represents an upper bound for the legally protected expectation under international law. In practice, compensation due could be lower, since the measure does not incorporate the improvement in the country’s solvency, in which non-participating creditors took no part. 62

63

C. Schreuer, ‘Unjustified enrichment in international law’, AJCL 22, (1974), 281–301; A. Vohryzek-Griest, ‘Unjust enrichment unjustly ignored: opportunities and pitfalls in bringing unjust enrichment claims under ICSID’, Loy LA Int’l & Comp L Rev, 31 (2010), 101. F. Sturzenegger and J. Zettelmeyer, ‘Haircuts: estimating investor losses in sovereign debt restructurings, 1998–2005’, IMF Working Paper No. 05/137 (Washington, DC: International Monetary Fund, 2005), 4–8.

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The suggested measure of compensation maintains equal treatment across participating and non-participating bondholders. Preferential treatment of non-participating creditors could in turn give rise to MFN claims. By complying with an ICSID award requiring payment of the bond’s face value, a country could be exposed to further BIT claims. If the standard of compensation were invariably full market value, the typically large discount on defaulted sovereign debt would provide strong incentives to initiate ICSID arbitration. In the ensuing rush to arbitration, a variant of the rush to the courthouse, debt restructurings could quickly unravel. Creditors use litigation to recover their claims. A single arbitration could precipitate ‘an avalanche of litigation and hamper coordinated attempts at recovery or renegotiation of debt’.64 To prevent individual creditor enforcement with negative externalities for all other creditors is a chief objective of municipal insolvency law for corporations and individuals.65 One caveat is in order: secondary market prices of sovereign bonds tend to collapse when a default is imminent. If a debt restructuring is carried out after default, bond prices will typically have already declined sharply. If a coercive restructuring triggers liability, the amount of compensation due could then be minimal. Conversely, higher compensation would be likely to obtain in preventive debt restructurings, and could deter states from addressing an unsustainable debt position early on. Under these conditions, compensation due on pre-default and postdefault restructurings could diverge considerably. Such unequal treatment is plainly undesirable from a legal and economic point of view. Compensation on bonds should be the same for ex ante and ex post restructurings, independent of the restructuring’s timing.

Case law on partial compensation There are a number of precedents for awarding less than the full nominal value of the bond. In the Standard Oil Company Claim, the US Foreign Claims Settlement Commission rejected a claim for repayment of the full nominal value on non-negotiable Romanian government bonds.66 64 65

66

B. Barnett, S. Galvis and G. Gouraige, ‘On third world debt’, HILJ, 25 (1984), 83–151, 88. J. Sachs, ‘Theoretical issues in international borrowing’, Princeton Studies in International Finance No. 54 (1984); National Bureau of Economic Research Working Papers No. 1189 (1984), www.nber.org/papers/w1189.pdf discusses the economic theory in the sovereign debt context. Standard Oil Company Claim.


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Standard Oil was only entitled to the fair and reasonable value of the bonds by reference to the market value of other (negotiable) Romanian bonds denominated in US dollars. The commission also referred to Romanian Thrings bonds, denominated in pounds sterling, which were nearly valueless when the Standard Oil-owned Romanian company holding them was nationalised by Romania, and which provided another reference value for compensation. They had been in default on both principal and interest since 1938. In Kellar,67 the arbitrator awarded only the consideration that bondholders had paid on acquisition, not their nominal value. In Eastman Kodak v Iran, the Iran–US Claims Tribunal opted for an innovative way of quantifying damages for Iran’s interference in Kodak’s contractual right of repayment from its wholly-owned subsidiary in Iran secured by promissory notes.68 As Kodak liquidated its subsidiary after the Iranian intervention, damages could only be assessed on the basis of reasonable forecasts about the future. Noting that it was called upon to determine an overall global amount and the uncertainties of repayment (i.e. default risk), the tribunal assessed damages at 50 per cent of the notes’ nominal value by effecting a reasonable and equitable adjustment.69 Another example of proposed equitable adjustment is the dissent in INA v Iran, where Judge Lagergren emphasised that ‘radical economic restructuring normally requires the “fair market value” standard to be discounted in taking account of “all circumstances”’.70 Notwithstanding this, the jurisprudence of international courts and tribunals regarding compensation on sovereign debt instruments is not uniform. Some tribunals also award the full nominal value. In Re Accounts of Ka¨the Friedla¨nder, the Holocaust Claims Resolution Tribunal relied on the Guidelines for the Valuation of Securities adduced by an expert.71 Under these rules, the market value for bonds not in default is generally to be awarded if that value is at or above the nominal value immediately prior to or on the date the account owner lost effective control over the account. If the market value falls short of the nominal value on the relevant date, the latter shall be awarded. The final chapter draws out some major implications of ICSID arbitration on sovereign debt instruments, and concludes.

67 70

68 Moore, Arbitrations, vol. 4, 3064. Eastman Kodak v Iran. 71 INA v Iran, 385, 390. In re Accounts of Ka ¨the Friedla ¨nder.

69

Ibid., 221.

14

Building durable institutions for the international adjudication of sovereign debt

This final chapter argues that in accordance with the standard jurisdictional clauses in modern debt instruments, national courts are the proper forum for any dispute arising out of sovereign debt. In the present state of international law, ICSID tribunals – in addition to lacking jurisdiction – are unable to effectively deal with sovereign debt crises. Their intervention would upset longstanding expectations in the sovereign debt market and raise several macroeconomic policy concerns. This conclusion does not imply that arbitration lacks potential in relation to dealing with sovereign defaults in the future, should states consent to such adjudication and set up suitable arbitral machinery. The chapter canvasses important consequences of ICSID arbitration on sovereign debt. For one, ICSID jurisdiction and liability could escalate sovereign debt disputes to new levels, and substantially increase incentives to holdout in future debt restructurings. It would also raise a host of macroeconomic policy concerns, in addition to defeating the longstanding expectations of dispute settlement in national courts. First, as functional control over international enforcement of sovereign debt instruments shifted from governments to individual creditors, creditor governments would lose their traditional role as diplomatic gatekeeper over sovereign debt. Economic policy flexibility in sovereign debt crises would shrink. Consideration of creditor claims would move further into the adjudicative realm. Conversely, this development could herald a more consistent treatment of similarly situated creditors across defaulting countries. Such internationalisation could hamper the defaulting country’s ability to differentiate treatment of creditors according to some criterion 316

building durable institutions

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of reasonableness. Such discretion is often critical for the success or failure of sovereign debt restructurings. Equal treatment of domestic and foreign creditors might be economically undesirable and politically unfeasible.1 Second, ICSID arbitration internationalises disputes on sovereign debt instruments. Sovereign debt disputes would lose their purely private character. ICSID may or may not possess enforcement advantages over municipal court judgments, but its awards undoubtedly enjoy higher visibility. On the margin, this enhanced opportunity set for enforcement will increase creditor protection. This, in turn, could lower governments’ sovereign borrowing costs. To assess whether borrowing governments would gain or lose, a number of other factors need to be taken into account. In a world where effective protection of sovereign bondholders in municipal courts remains by and large elusive, ICSID could partially substitute for this institutional shortcoming. The resulting increase in the protection of creditor rights ought to be good news for creditors. Consequently, ‘political’ factors precluding international enforcement of sovereign debt instruments are likely to recede.2 However, the pronounced shift to the adjudicative realm and away from the policy realm could prompt creditor governments to disengage from the management and resolution of sovereign debt crises. They might use informal diplomatic channels less frequently than at present. Support for large IMF bailouts could also decline. The effect of ICSID intervention on sovereign bondholders is ambiguous. ICSID intervention raises important questions about the workability of future sovereign debt restructurings. Increased creditor protection via ICSID could shake up the crisis arsenal of defaulting countries and derail efforts by the international community to resolve debt crises in an orderly manner. At the same time, it holds out the prospect for a more effective enforcement against defaulting states. Such increased creditor protection via ICSID could cause the size of the sovereign debt market to grow and improve its operation. The large economics literature on sovereign debt starts with the paradox of why countries repay their debt at all, given the absence of an international

1

2

A. Gelpern and B. Sester, ‘Domestic and external debt: the doomed quest for equal treatment’, Georgetown Journal of International Law, 35 (2004), 795–814. H. Thompson and D. Runciman, ‘Sovereign debt and private creditors: new legal sanction or the enduring power of states?’ New Political Economy, 11 (2006), 541–55.

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enforcement mechanism.3 Instead of relying largely on reputation, the sovereign debt market might be able to grow in size by underpinning contractual repayment promises of countries with the threat of actual enforcement. This expansion of sovereign borrowing space could have positive social welfare consequences, for the borrowing country, its population and its creditors. Debtor country welfare will depend on the available methods for resolving sovereign financial distress. If increased possibilities of enforcement via ICSID go hand-in-hand with more institutionalised means of restructuring sovereign debt and accrued protection for the country’s essential services, then ICSID arbitration on sovereign debt instruments could be beneficial for all stakeholders. Without such protection in financial distress, however, borrowing countries are likely to lose out. Large payments to sovereign creditors are likely to imply cutbacks in domestic expenditures. In these circumstances, the welfare losses from reducing essential services in financial distress could outweigh any gains from cheaper access to financing. The next question is how effective ICSID arbitration on sovereign debt would be.

A. The effectiveness of ICSID arbitration Would sovereign debt arbitration under ICSID rules bite? Sovereign immunity from execution is the major constraint in enforcing sovereign debt instruments in national courts. There are two possibilities. The first is that sovereign immunity from enforcement constrains enforcement of both ICSID arbitral awards and national courts’ judgments in similar ways. If this first view is correct, then obtaining an ICSID award against a defaulting sovereign might offer little more to creditors than moral vindication and a minor bargaining chip. As countries typically have few assets abroad, sovereign debt arbitration under ICSID might bite only on the margin. It could disappoint 3

U. Panizza, F. Sturzenegger and J. Zettelmeyer, ‘The economics and law of sovereign debt and default’, Journal of Economic Literature, 47 (2009), 651–98, J. Eaton and R. Fernandez, ‘Sovereign debt’, in G. M. Grossmann and K. S. Rogoff (eds.), Handbook of International Economics (Amsterdam: Elsevier, 1995), vol. 3, 2032–77 and K. J. Mitchener and M. D. Weidenmier, ‘Supersanctions and sovereign debt repayment’, Journal of International Money and Finance, 29 (2009), 19–36 survey the field. Seminal contributions include J. Bulow and K. Rogoff, ‘A constant recontracting model of sovereign debt’, JPE, 97 (1989), 155–78; A. Rose and M. M. Spiegel, ‘A gravity model of sovereign lending: trade, default, and credit’, IMF Staff Papers, 51 (2004), 50–63.


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creditor expectations of increased enforcement possibilities. The jury is still out as to whether this view represents a reasonable approximation of reality, since so far compliance with ICSID arbitral awards has been voluntary and high. That ICSID is part of the World Bank Group is one attraction of the ICSID arbitral process. Potential claimants in ICSID perceive this institutional association as an advantage, in that it encourages states to comply with awards voluntarily and more readily than they might otherwise. Failure to comply with an ICSID award may potentially draw the unfavourable attention of the World Bank, including in relation to other financing activities. It remains to be seen how successful enforcement would be if the debtor government were adamant about not paying an ICSID award. The second possibility is that sovereign immunity from enforcement is, in practice, a lesser constraint for ICSID awards. First, under the Convention, awards need to be enforced in member states, including the host country, like a judgment of the highest court.4 Since sovereign immunity from execution tends to be greater abroad than at home, this opens up additional prospects for attachment. Second, by not complying with an ICSID award, the country commits an international, and very public, breach. For that reason, ignoring ICSID awards could entail higher reputation costs in international capital markets and hinder future market access. Countries refusing to pay ICSID awards may also be prevented from accessing World Bank or IMF funding. Neither institution has publicly stated its policy on whether it would lend to a government that refused to pay an ICSID award. As a general rule, the IMF does not lend to countries that have defaulted on obligations to it, but there is a complex set of exceptions (the ‘lending into arrears’ policy). Particularly contentious is the IMF’s lending to governments if they are in arrears to private creditors. Should ICSID entertain sovereign debt claims, a sustained rise in adjudication of sovereign debt disputes is likely. At first approximation, the number and size of lawsuits and arbitrations is a function of potential payoff. This is the first channel through which the number and size of claims could increase. Also, ICSID awards are themselves valuable bargaining chips. For one, they could be used to exert political pressure. Second, non-participating creditors could perhaps restrain market access for recalcitrant sovereign borrowers more effectively. The third, and most important, channel is incentives to holdout. 4

Article 54 of the ICSID Convention.

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This dynamic effect, which is felt on the inter-creditor and the debtorcreditor plane, is explained below.

B. Creditor incentives to participate in restructurings Incentives to holdout are likely to increase. Crucially, the group of participating and non-participating creditors is not static. Rather, the incentives and payoffs for creditors shape the debt restructuring game and their participation. After Argentina’s default in 2001, the mere possibility of ICSID arbitration might have encouraged some bondholders to stay out of the restructuring. Leverage may shift to creditors who refuse to go along in a restructuring as a group. In this setting, the cost of binding potential non-participating creditors to the restructuring could increase substantially. Conversely, the pie available for creditors participating in the restructuring would decrease, as would the funds available to the debtor country for the maintenance of public services. Enhanced protection for creditor minorities due to ICSID intervention might disadvantage those creditors who are prepared to go along with the proposed restructuring. On the creditor-debtor plane, bargaining power is likely to shift to creditors as a group. A defaulting government might then find it harder to coordinate diverging creditor interests, and if necessary negotiate equitable burden sharing and relief with the totality of its creditors. Bond exchanges and similar restructuring techniques would involve an additional layer of complexity. The time to complete an orderly sovereign debt restructuring could increase. This in turn could be costly for the country concerned, as it might delay economic recovery and regaining access to international capital markets. Undoubtedly, there is a profound gap in the legal protection of sovereign creditors. Several reasons for holding out exist, and not all of them are necessarily obstructive. However desirable effective protection for sovereign creditors may seem, increasing such protection is a matter for legal policy. ICSID tribunals, as adjudicative organs, lack the authority to bring about the large shift necessary to bridge the existing wide gap in creditor protection. In order to enhance creditor protection, ICSID tribunals would need to reconfigure the landscape for sovereign lending more broadly. Arbitral restraint is due in questions going to the heart of sovereign financing and the functioning of a government. If the consequences of ICSID arbitral awards were to extend far into sovereign debt


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restructuring and general macroeconomic policy without proper basis for such intervention, ICSID arbitration’s Achilles heel could be exposed.5 A backlash from borrowing governments would be likely, be it in the form of more sovereign debt restructuring annexes that explicitly rule out sovereign debt from the BIT’s investment definition, limitations on the applicability of treatment standards to sovereign debt, or more drastic steps such as denouncing the ICSID Convention. In recognition of this tension, the Saluka tribunal underscored the need for balanced treaty interpretation in investment arbitration. This need arises ‘since an interpretation which exaggerates the protection to be accorded to foreign investments may serve to dissuade host States from admitting foreign investments and so undermine the overall aim of extending and intensifying the parties’ mutual economic relation’.6 Such long-term damage to the institution of investment arbitration is even more likely if ICSID tribunals bring disputes under their umbrella which neither the state parties nor the participants in the sovereign debt market contemplated. In current state practice, many central questions arising in sovereign debt restructurings are addressed in established political fora. The International Monetary Fund and the Paris Club are important players. Good examples of questions which are routinely decided by these organisations are debt sustainability, the appropriate amount of debt relief, and the type of financial assistance to be provided. This status quo suggests that states – as a matter of lending policy – still attach importance to a large degree of political control over sovereign lending, sovereign debt restructurings and debt relief. There would be resistance from several quarters to delegating such control in large part to an international organisation, or indeed to international arbitral tribunals. The divorce of sovereign debt from political considerations in international law, albeit developing progressively, remains incomplete. ICSID tribunals ought to resist the temptation of imposing their idiosyncratic views on appropriate macroeconomic policies. Arbitrators dealing with claims arising out sovereign debt need to take the public interest into account. In the case of sovereign debt crises, enforcement of creditor rights without limitation may impair not only the interests 5

6

Warnings about the phenomenal rise of ICSID arbitration and the attendant risk of a quick fall from grace among investors and host states abound, e.g. B. Cremades and D. Cairns, ‘The brave new world of global arbitration’, JWI, 3 (2002), 173–209, 174. Saluka v Czech Republic, para. 300.

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of the affected country, but also the interests of the international community as a whole. Justice Brandeis explained this in his dissent in New State Ice Co. v. Liebmann. Referring to the Great Depression as ‘an emergency more serious than war’,7 he explained that judges (and by extension arbitrators) should be very careful not to erect their personal preferences on economic policy into legal principles: To stay experimentation in things social and economic is a grave responsibility. Denial of the right to experiment may be fraught with serious consequences to the nation.8

Experimentation is critical to respond to changing economic and social needs. Economic policy is not an exact science, but rather an ‘uncharted sea’.9 Similar arguments have been made in the domestic context. Vermeule maintains that judges have almost always less information than legislators. They are typically ill-equipped to decide policy trade-offs inherent in economic policy, especially in turbulent times, and lack the democratic legitimacy to decide among competing options.10 In addition, the door to floodgate liability on sovereign debt instruments could be cast open. Investment treaty arbitration in general opens up unprecedented possibilities for private investors to obtain compensation for a broad range of governmental measures, which often go far beyond state liability in developed municipal legal systems. The additional element that such compensation would need to be paid in or shortly after exiting from financial distress only magnifies this concern. Sizable compensation due for sovereign defaults could restrict sovereign manoeuvrability in national economic emergencies. Liability could be of a magnitude capable of deepening the state’s budgetary difficulties, adversely impacting long-term debt sustainability and substantially delaying the country’s economic recovery. Given the magnitudes involved in the sovereign debt market today, liability payable by defaulting debtor countries could be very large indeed. In many cases, compensation due could be of macroeconomic and systemic importance. In these circumstances, the question whether a multitude of awards in favour of sovereign creditors would inflict too serious a financial cost on a government and its population begs an answer. 7 10

8 9 New State Ice v Liebmann. Ibid., 311. Ibid., 310. A. Vermeule, Law and the Limits of Reason (Oxford University Press, 2008).


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C. Arbitrating sovereign capacity to pay This section looks to the future, and asks whether other international tribunals could deal effectively with sovereign defaults. My answer is a qualified yes. The preconditions for effective arbitration in the future include dedicated and durable institutions, the progressive development of the international law on public debt, and protection for the country’s essential public services in financial distress. This idea of reorganising finances of defaulting states through international arbitration has long currency. Early in the twentieth century, Wuarin laid out considerations for reorganising the finances of defaulting states. The arbitrators would need to examine, among other things, the country’s economic conditions and projected future economic developments, as well as the state’s budgetary and fiscal situation.11 Similarly, Fischer Williams would require arbitrators to carefully examine the internal needs of the country.12 The ability to determine a country’s payment capacity would be a prerequisite for any international court or tribunal to hear claims arising from sovereign debt instruments.13 While countries in default are not the sole judges of their ability to pay, at present ICSID tribunals lack the authority to assess this financial constraint. Likewise, ICSID’s legal basis for determining whether a country defaulted strategically or acted in bad faith during the sovereign debt restructuring is tenuous. Given proper authority, international arbitral tribunals could assess a state’s payment capacity. As Part I of this book shows, there are precedents for the international arbitration of a country’s capacity to pay. However, the economic tools to assess sovereign payment capacity are still in their infancy, and opinions differ on the appropriate methodology. This is an additional reason why, in the present state of international law, sovereign debt disputes should generally be resolved before the contractually chosen forum – that is, national courts, and through existing institutions such as the IMF and the Paris Club. 11

12

13

´tats et la protection des droits des porteurs de fonds d’E´tats A. Wuarin, Essai sur les emprunts d’E étrangers (Paris: J. B. Sirey, 1907), 128–29. J. Fischer Williams, Chapters on Current International Law and the League of Nations (London: 1929), 327–29. Cf. also Drago, ‘State loans in their relation to international policy’, AJIL, 1 (1907), 705. And see K. Raffer, ‘Applying Chapter 9 insolvency to international debts: an economically efficient solution with a human face’, World Development, 18 (1990), 301–13. A. N. Sack, Les Effets des transformations des états sur leurs dettes publiques et autres obligations financie`res: traite´ juridique et financier (Paris: Sirey, 1927), 528, draws out the importance of capacity to pay in apportioning debt shares in state succession.

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The League of Nations’ International Loans Tribunal A special committee charged with the Study of International Loan Contracts called for ‘a committee of legal experts to examine . . . a system of arbitration – which could, if the parties so desired, be inserted in [international loan contracts]’.14 Leading financiers and financial lawyers became members of the committee, including Otto Niemeyer of the Bank of England and Reuben Clark, Chairman of the Foreign Bondholders Protective Council. However, the terms of reference of the financial committee were limited to international private loans. Inter-governmental loans and domestic borrowing were excluded.15 The reason for this was concern among governments about their own creditworthiness, particularly at a time when World War I and the Great Depression had wreaked such havoc on the public finances of many countries. Based on the largely positive experience with financial reconstruction of European states after World War I, the League of Nations proposed the creation of an International Loans Tribunal with the power to adjudicate lending contracts.16 The impetus for this effort came from the Dutch government, which asked the League to prepare special arbitration clauses which might be included in international loan contracts.17 Two methods of settling disputes arising out of sovereign defaults were on the table: an institutionalised form in the form of a standing international tribunal or ad hoc arbitration. One of the committee’s central recommendations was a model arbitration clause for sovereign debt instruments. The decision of the arbitral tribunal would have been binding. The president of the PCIJ would appoint three arbitrators from a standing roster of nine. Access to the tribunal would be open to any debtor government, creditors with no less than 10 per cent of any given bond issue, to the trustee of the issue, and to official representatives of creditors. The draft provided:

14

15 16

17

League of Nations, Report of the Committee for the Study of International Loan Contracts (Geneva: League of Nations, 1939), 5; ILA, Report of the 61st Conference (Paris, 1984), MOCOMILA, 154–82, 155. League of Nations, Report of the Committee, 6–7. League of Nations, Report on the Financial Reconstruction of Hungary by the CommissionerGeneral of the League of Nations for Hungary (Geneva, League of Nations: 1923); J. A. Salter, ‘The financial reconstruction of Austria’, AJIL, 17 (1923), 116–28; League of Nations, The Financial Reconstruction of Austria: General Survey and Principal Documents (Geneva: League of Nations, 1926). E. Borchard, State Insolvency and Foreign Bondholders: Vol. 1, General Principles (Yale University Press, 1951), 40.


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(a) Any dispute concerning the rights and obligations arising out of the loan contract shall be submitted to the Arbitral Tribunal constituted as provided hereunder. The Tribunal’s decision shall be final and binding. (b) The following parties may seize the Tribunal, namely, the debtor Government; any bondholder or bondholders in possession of securities not less than 10 percent of the amount outstanding; any official representative of the bondholders; any officially recognized authority concerned with the protection of bondholders; the supervisor. (c) Failing agreement between the parties for the submission of the case, any party may seize the Tribunal directly by means of unilateral application. The Tribunal may give judgment, by default if necessary, in any dispute so brought before it. (d) The Tribunal shall decide all questions relating to its competence. (e) The Tribunal shall consist of three persons nominated at the request of one or more of the parties mentioned above, by the President of the Permanent Court of International Justice, from a standing panel of nine persons chosen by the Court.

The ‘ad hoc’ arbitration tribunal was to decide cases based on law, rather than decide on grounds of equity or splitting the difference. It had Kompetenz-Kompetenz to decide its own jurisdiction, the power to develop its own procedure and to choose the place of proceedings. Its fees would be paid, with the exception of frivolous cases, by the debtor government. It was seen as desirable for the same arbitrators to sit in all cases to achieve a uniform jurisprudence.18 The proposed International Loans Tribunal went further. A chief attraction of the Tribunal was that questions of applicable law, gold clauses and debtor defences would be decided on the basis of international law and national law applied together by an international tribunal, rather than decided variously by national courts. In contrast to the ad hoc arbitration tribunals, the jurisdiction of the Loans Tribunal was to be compulsory. Three judges would be appointed for ten-year terms and its decisions would be equivalent to decisions of the highest courts in domestic legal systems. The International Loans Tribunal would have had exclusive competence over international loans. The committee regarded internationalisation by way of an international convention and a dedicated arbitral tribunal as the ‘complete solution of the legal difficulties’ presented by debt instruments.19 The tribunal was, however, not meant to serve as a full-scale international insolvency court, but provide arbitral machinery for claims arising out of sovereign debt.20 This early precursor to the Sovereign Debt Restructuring Mechanism has yet to receive due attention. 18 20

19 Ibid. Ibid. 27. A. Reinisch, State Responsibility for Debt (Vienna: Bo ¨hlau, 1995), 16, n. 74.

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Neither arbitration clauses as standard clauses in sovereign debt instruments nor the International Loans Tribunal became a reality. At a more general level, a League of Nations proposal for a mechanism to settle international economic disputes failed.21 Opposition to mechanisms to settle international economic disputes through adjudication before international courts and tribunals centred on two points. First, such a dispute settlement body would not be able to adapt to constantly changing international economic conditions. Second, the adjudicators were likely to lack the necessary expertise. This sentiment was widespread at the time, and echoes the judgment in the Free Zones of Upper Savoy and District of Gex case, where the PCIJ emphasised that judicial settlement was inappropriate for economic disputes.22 Dispute settlement as applied in international economic law since then has changed almost beyond recognition. The wide acceptance of WTO dispute settlement testifies to this seachange in international economic law. The second objection is linked to the first, and holds that it would be impossible to find suitably qualified candidates to act as adjudicators. Even though these two concerns may be overblown, the two objections reflect genuine concerns about whether such a mechanism is desirable, and how it could be enacted and implemented.

D. Balancing creditor protection and a fresh start for debtor countries Resolving a financial crisis quickly and putting the country back on a sustainable growth path is the very essence of a legitimate regulatory purpose. The Saluka tribunal is particularly instructive on this point: ‘It is now established in international law that states are not liable to pay compensation to a foreign investor when in the normal exercise of their regulatory powers they adopt in a nondiscriminatory manner bona fide regulations that are aimed at the general welfare.’23 ICSID tribunals affirming jurisdiction over sovereign debt owe deference to the paramount objective of the country’s economic recovery. This objective to exit financial distress also manifests itself in municipal 21

22 23

The Rules of Procedure for the Friendly Settlement of International Economic Disputes between States, Council of the League of Nations, 28 January 1932. Socie´te´ des Nations, Proce´dure pour le re`glement amiable entre États des diffe´rends d’ordre économique (Geneva: League of Nations, 1932), 4–5. Free Zones of Upper Savoy and District of Gex. Saluka v Czech Republic, para. 254.


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law. Insolvency law increasingly encourages reorganisation of the debtor’s finances to allow economic recovery. International arbitral tribunals ought not to second-guess often difficult trade-offs in a country’s macroeconomic policy mix. Like the judicial restraint national courts routinely exercise in macroeconomic matters, arbitral tribunals need to stay above the fray. Under current international investment law, it is unclear when it is appropriate to relieve sovereign debtors in financial distress of their pecuniary obligations. Emergency legislation, including debt moratoria, needs to be assessed. There are few precedents for such assessments by international courts and tribunals in the context of sovereign debt crises. The institutional prerequisites and broader legal principles for the successful arbitration of sovereign debt instruments are still missing. We live in a world of ad hoc debt restructurings, largely on the basis of techniques developed from corporate restructurings. The time for arbitration may soon arrive. Such arbitration needs to be embedded in a coherent and mature fabric of international law on sovereign debt. Was Du Pont then correct to regard international arbitration on sovereign debt as a Pandora’s box? Recall that in that case, the Mexican commissioner declined jurisdiction along with the US commissioner with reference to ‘general propriety and justice’, holding that ‘[t]he disturbance which would ensue in the administration, credit, and relation of modern nations, if claims on the account of the public debt, such as those involved in this case, were made the matter of international claims, has long been understood’.24 At the abstract level, the answer may be yes. As long as international law on public debt remains underdeveloped, ICSID arbitration in sovereign debt disputes involves substantial risks for the smooth operation of the sovereign debt market, and for the provision of essential public services in highly indebted debtor countries. Moving the field of sovereign debt away from diplomacy and official intervention remains incomplete until an international tribunal is established and charged with adjudicating sovereign defaults.25 Unless countries in genuine financial distress have machinery at their disposal to carry out an orderly and rapid restructuring of their debt, ICSID arbitration is likely to fundamentally upset the sovereign debt market. With sovereign debt, ICSID would enter a novel and difficult terrain. 24 25

Du Pont v Mexico (US v Mexico). P. C. Jessup, A Modern Law of Nations (New York: Macmillan, 1956), 115.

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ICSID’s focus on creditor protection alone would threaten resolution of future sovereign debt crises. Such a consequence goes against the interests of the creditor majority and also the international community as a whole.26 National judgments at times also adopt a sceptical view of sovereign debt litigation. Sometimes, they avoid adjudicating sovereign debt disputes altogether.27 Courts decline jurisdiction on the basis of doctrines such as act-of-state or comity. For instance, the Italian Corte di Cassazione in a case brought by an Italian bondholder against Argentina did not look to the underlying bond transaction, but rather to the payment moratorium by the Argentine government in the financial crisis, and declined jurisdiction.28 In the last three decades, national courts tend to accept sovereign lending disputes more liberally. With ICSID, the pendulum could swing away from dispute resolution in domestic courts according to private law to international tribunals adjudicating largely on the basis of international law. This internationalisation could limit the government’s policy flexibility in sovereign debt crises. There is much room for progressive development of international law on public debt. Current legal machinery to buffer countries against economic and political shocks impairing their payment capacity is largely absent. As a result, sovereign defaults are a perennial source of international tension – in our own time as much as one hundred and more years ago. Current international law provides only minimal protection to sovereign creditors. ICSID offers tremendous benefits to investors and host state willing to settle their disputes by arbitration. Yet it is not the specialised and dedicated institution that may be needed to deal with claims arising out of sovereign debt in a systematic manner, and to effectively resolve future sovereign debt crises. In 1925, Herbert Feis, the economic adviser to the State Department, recommended greater use of arbitration on creditor claims as ‘sound 26

27

28

M. Waibel, ‘Opening Pandora’s Box: sovereign bonds in international arbitration’, AJIL, 101 (2007), 755–58. Cf. generally J. J. Fawcett, Declining Jurisdiction in Private International Law (Oxford University Press, 1995); A. Reinisch, International Organisations before National Courts (Cambridge University Press, 2000) (discusses ‘avoidance techniques’ in litigation against international organisations in national courts). The Second Circuit in Allied Bank v Banco de Cartago (1985), originally reached a similar result.


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and advantageous from both the international as well as the national point of view’.29 He recognised that even though the ‘results may not always be as favorable to powerful creditor states as those that might have been obtained by the use of force’, ‘the time is ripe, more than ripe, for a series of general international conventions in the field’.30 Eightyfive years later, the law on sovereign debt remains underdeveloped. The time has come for lawyers to re-energise the field.

29

30

H. Feis, ‘Export of American capital’, Foreign Affairs, 3 (1925), 685 (citing several US loans to Central American states, and the Czechoslovak loan of 1922 as favourable experiences). Ibid.

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Index

ABRA (Argentine Bond Restructuring Agency), 16, 277 act of State doctrine, 123–24 admissibility, 267, 272 Ador, Gustave, President of Swiss National Council, 89 AFPER (Association Française des Porteurs d’Emprunts Russes), 184 Alverstone, Richard, Lord Chief Justice, 89 American Task Force Argentina (AFTA), 16, 105 American depository receipts (ADRs), 223 Andrade, Ignacio, Commissioner, 305 applicable law. See also jurisdiction contractual versus treaty causes of action, 255–59 ICSID cases, 210 League of Nations International Loan Tribunal proposal on, 324–26 in monetary reform, 63–64, 68 arbitration. See international arbitration Argentina arbitration clauses in sovereign debt instruments, 16, 162 Associazione per la Tutela degli Investitori in Titoli Argentini (TFA) balancing creditor protection with needs of debtor countries, 328 coercive restructuring, 289–93 creditor organisations, 105 currency board with US dollar, 60, 61 expropriation, default and restructuring as, 280 fair and equitable treatment obligation, 293, 294–96 financial necessity, 88, 98–102

350

Hague Convention Respecting the Limitation of the Employment of Force for the Recovery of Contract Debts, reservations to, 264 ICSID arbitration of 2001 default cases, 320 ICSID cases involving BITs with, 210 GCAB on advantages of ICSID, 211 jurisdiction, 218, 223, 224–26, 233, 240 sovereign debt instruments, coverage of, 245 treaty versus contractual claims, 254, 255 waiver of right to arbitration, 267–69 Ley 26017, 18, 289–90, 296 national courts, creditor suits in, 121, 122 repudiation, default and restructuring as, 288 sovereign default and restructuring, 2001, 15–19, 320 Argentina Bond Restructuring Agency (ABRA), 16, 277 armed intervention. See war Armenia and World War Foreign Debt Commission, 107 Articles on State Responsibility. See International Law Commission (ILC), Articles on State Responsibility assignment of sovereign debt, 308–12 Association Française des Porteurs d’Emprunts Russes (AFPER), 184 Association Nationale des Porteurs Français des Valeurs Mobilie`res, 80, 82, 104 Association pour la De´fense des De´tenteurs de Fonds Publics, 105

index Associazione per la Tutela degli Investitori in Titoli Argentini (TFA), 16 attachment central bank reserves, 17, 66, 126 prejudgment, 122–24, 127 Australia, on definition of investment, 217 Austria arbitration clauses in sovereign debt instruments, 160 Council of the Ottoman Public Debt, 89 arbitration of state succession to public debts of Austro-Hungarian Empire, 133–34, 286 investment, definition of, 217 World War Foreign Debt Commission and, 107, 112, 114–15 Bacon, Augustus, US Senator, 6 ´zuriz Protocol, 139 Bacourt-Erra Barge, Umpire, 267 Bainbridge, Commissioner, 267 Balance of payments, 123, 152 Baldwin, Stanley, British Prime Minister, 108 bank debt, 11–14 Bank for International Settlements (BIS), 75, 144–46 bankruptcy proposals for sovereign debt, 14, 20 Barings Bank, London, 134–35 Basdevant, Jules, Judge, 70 Bates, Joshua, 134–36 Beernaert, Auguste, Belgian Prime Minister, 89 Belgium Association pour la De´fense des De´tenteurs de Fonds Publics, 105 creditor protection in international law, 179 Dawes Loan, 143 Dominican Republic quasi-receivership, creditors in, 51 financial necessity, 94–97 monetary reform, case involving, 77 national courts, creditor suits in, 128 Versailles Treaty, claims for war damages under, 112–13 World War Foreign Debt Commission 106, 107, 112–14 Belmont, August, US emissary to London, 4 Bey, Halil, Turkish Minister of Foreign Affairs, 89 bilateral investment treaties (BITs) Argentine default of 2001, financial necessity, 98–102 bundling creditor claims, 276–78 coercive debt restructuring, 289–93 compensation under Hull formula, 301

351

insurance against risk, BITs not functioning as, 298, 299 partial compensation encouraging collective action, 314 expropriation defaults regarded as, 278–89 of intangible property, 203 fair and equitable treatment obligation, 293–97 ICC arbitration, 154, 210 ICSID and, 209–11 BIT consent to jurisdiction of, 212, 213–16, 227, 229, 230 contractual versus treaty causes of action, 253–59 exclusive and non-exclusive domestic jurisdiction clauses, 260–61, 272 investment, divergent definitions of, 217 sovereign debt instruments, BIT coverage of, 244–47 standing to sue, 218 territorial requirements, 238–42 247–50 types of claims, 211 unity of contractual bargain 261–62 waiver of right to arbitration, 270–72 increase in number of, 210 national treatment and MFN clauses, 273–78 standards of treatment, 257 UNCITRAL arbitration, 210 waiver of right to arbitration and ICSID arbitration, 270–72 mixed claims commissions, 266–69 BIS (Bank for International Settlements), 75, 144–46 Bismarck, Otto von, German Chancellor, 39 BITs. See bilateral investment treaties Black, Eugene, President of the World Bank, 83 bond exchange, 190, 274, 279, 290 bondholder organisations, See creditor organisations Borchard, Edwin, 13, 10, 38, 103–05, 204, 205, 277, 281 Borel, Euge`ne , 130, 132 Brady Plan, 126–28, 305 Brandeis, Louis, Justice, 343 Brazil arbitration clauses in government bonds of, 157 monetary reform, cases involving, 60–68 Britain. See United Kingdom Broches, Aaron, 214, 215, 246, 277 Brown, Philip, 132, 133 Bruce, Frederick, Umpire, 174, 176

352

index

Bulgaria arbitration clauses in sovereign debt instruments, 160 assignment of sovereign debt, 310 capacity to pay, international arbitration of, 155–56 creditor protection in international law, 196 Eastern Roumelian annuity, 89, 133 independence from Ottoman Empire, payments for, 91 international arbitration of state succession to Ottoman public debt, 130, 131, 133 bundling creditor claims, 276–78 Burton, Theodore, US Senator, 107 business environment, 296 Bustamante y Rivero, Jose´, Judge, 63 CACs (collective action clauses), 15, 21, 261 Caillaux, Joseph, French Prime Minister, 89, 108, 115 Caisse Commune des Porteurs des Dettes Publiques Autrichienne et Hongroise, 133 Calvo Clauses, 177, 263–66, 269, 271 Calvo Doctrine, 177, 263–66, 269, 271 Canada model BIT, 244 odious debt of Tinoco dictatorship in Costa Rica, international arbitration of, 136–38 capacity to pay balancing creditor protection with needs of debtor countries, 326–29 court’s ability to determine, 323 international arbitration of, 143–156 World War Foreign Debt Commission’s consideration of, 118–19 capital flight, 20 Cassese, Antonio, 80 CFB. See Corporation of Foreign Bondholders (CFB), UK Chamberlain, Neville, British Prime Minister, 147 champerty (purchase of debt with intent to sue), 127 Chase, Salmon, US Chief Justice, 175 Chile BIT with US, 246 ICSID arbitration, 232 war between Peru and (1879), 73, 138–140 China creditor protection in international law, 200 political responses to sovereign defaults in, 26

choice of forum exclusive and non-exclusive domestic jurisdiction clauses, 260–61, 272 unity of contractual bargain, preserving, 261–62 Chorzo´w principle, 301 Civil War, US, and debt repudiation by Southern States, 3–4 Clark, Reuben, 325 class action, See mass claim clauses arbitration clauses in sovereign debt instruments. See under international arbitration collective action clauses, 15, 21, 261 Calvo Clauses, 177, 263–66, 269, 271 exclusive and non-exclusive domestic jurisdiction clauses, 260–61, 272 gold clauses, 81, 151, 289 MFN clauses, 246, 262, 273–78, 314 national treatment clauses, 246, 273–78 umbrella clauses, 253–54 Clay, Henry, Chairman FCSC, 192, 195, 285 Clemenceau, Georges, French Prime Minister, 113 collective action clauses (CACs), 15, 21, 261 collective action, partial compensation to encourage, 313–14 Colombia arbitration clauses in sovereign debt instruments, 158–59, 160 compensation on sovereign debt, 305 creditor protection in international law, 173–76 monetary reform, cases involving, 180–82 Panama’s independence from, 158–59 commercial risk sharing criterion, and ICSID jurisdiction, 237–38, 299 commercial undertaking, association with, and ICSID jurisdiction, 242–44 commercial versus state acts, 278–80 compensation on sovereign debt, 298–315 assignment, 308–12 basic philosophy of international law regarding, 298–301 BITs. See under bilateral investment treaties collective action, encouraging, 313–14 ICSID. See under International Centre for Settlement of Investment Disputes international legal philosophy on, 298–301 lump-sum agreements, 120, 193, 196, 285, 302 net of default risk method of calculating, 313

index partial compensation, 301, 315 See also partial compensation on sovereign debt secondary market purchases, 312–15 speculation, sovereign debt instruments viewed as, 303–08 in state practice, 302–03 conciliation in monetary reform cases, 80–84 concurrent jurisdiction. See overlapping jurisdiction Confederacy, US, repudiation of debt by, 3–4 Congo Club, 152 Congo, Democratic Republic of capacity to pay, international arbitration regarding, 152–55 ICSID arbitration, 213, 216, 224, 301 contract law expropriation of contractual rights, 201–06 preserving unity of contractual bargain, 261–62 repayment rights as contractual entitlements, 281 treaty versus contractual causes of action, 253–59 Corporation of Foreign Bondholders (CFB), UK, 103–04, 158–59 arbitration clauses in sovereign debt instruments, 158–60 on financial necessity, 89–91 quasi-receiverships, 51 US state defaults, 5, 6 use of force to compel payment, 31 Correa, Rafael, Ecuadorian President, 142 Costa Rica arbitration clauses in sovereign debt instruments, 158 national courts, creditor suits in, 122–24 odious debt of Tinoco dictatorship, international arbitration of, 136–38 creditors secured, 31, 48, 54, 139, 144, 169, 173, 190, 195, 198, 292 unsecured, 54, 169, 189–190, 238, 285, 303 creditor governments, political responses of. See political responses creditor organisations, 16, 103–05, 277 creditor protection in international law, 169 balancing with needs of debtor countries, 326–29 basic philosophy of, 298–301 bundling creditor claims, 276–78 directness criterion, 169–71 ECHR, 182–89 investment law, 201–06

353

Iran–US Claims Tribunal, 170, 187–89 mixed claims commissions, 171–182 national claims commissions, 189–201 Foreign Compensation Commission (UK), 195–201 Foreign Claims Settlement Commission (USA), 189–95, 284–87 standing to sue, 194–95 trustees, 195 creditworthiness, 3, 11, 25, 181, 243, 299–300, 313, 325 Crimean War, 89 Crivellaro, Antonio, 269 Croatia creditor protection in international law, 187 Universal Postal Convention, international arbitration of odious debt under, 141–42 Cuba Spain, sovereign default by, 25 US state debt default suits, 7 World War Foreign Debt Commission and, 106, 107 Cummings, Homer, US Attorney General, 28–29 currency. See entries at monetary reform Czech Republic coercive restructuring, 289 ICSID arbitration, 219–20, 224–26, 227, 229–30, 233, 236 Czechoslovakia arbitration clauses in sovereign debt instruments, 159, 161 creditor protection in international law, 196, 200–01 international arbitration of state succession to public debts of AustroHungarian Empire, 286 non-payment distinguished from breach of international law, 285–87 repudiation, default regarded as, 288 World War Foreign Debt Commission and, 106, 107, 114 Davis, Jefferson, President of Southern Confederacy, 4 Dawes Plan Arbitral Tribunal, 149–50 Dawes, Charles , US Vice President, 143 Dawes Commission, 115 Dawes Loan, 143–44, 146, 148, 160 debenture, 13, 82, 173, 199, 201, 244, 246 debt face value, 17–18, 82, 105, 126, 128, 194, 198, 200, 225, 298, 304–7, 312–14 maturity, 13, 83, 85, 107, 114, 119, 223, 231, 236, 244

354

index

debt (cont.) securities, 4, 11–13, 23, 25, 27–28, 47, 198, 218, 244, 249, 299, 315, 325 value on secondary market, 108, 148, 304 debtor countries, balancing creditor protection with needs of, 326–29 default risk and ICSID jurisdiction, 234–37 Delaume, Georges, 216, 226 Democratic Republic of the Congo capacity to pay, international arbitration regarding, 152–55 ICSID arbitration, 213, 216, 224, 301 Denmark, and compensation on sovereign debt, 308 Depression. See Great Depression diplomatic interventions and settlements, 26, 38–41 discount, 36, 127, 154, 225, 304, 306, 312–13, 315 Doha Declaration on Financing for Development, 311 Dolzer, Rudolf, 233, 247 Dominican Republic, quasi-receivership. See under quasi-receiverships for highly indebted countries Douglas, Zachary, 183, 203, 239, 246, 271, 311, 312 Drago Doctrine, 35–38 Drago, Luis Maria, Argentine Foreign Minister, 35, 204 Drago–Porter Convention, 37–38 Dreyfus Fre`res et Cie, 138–41 due process objections to debt restructuring, 295 Eastern Roumelia annuity, 89, 133 assignment of sovereign debt of Ottoman Empire to, 310 ECHR. See European Court of Human Rights economic necessity. See financial necessity The Economist, 39, 147, 148 Ecuador arbitration clauses in sovereign debt instruments, 158 creditor protection in international law, 177–79 odious debt, international arbitration of, 142–43 Edwards, Richard, 99 Egypt arbitration clauses in sovereign debt instruments, 159 Caisse de la Dette and quasi-receivership in, 42, 44, 46–47, 51 creditor protection in international law, 202 ICSID arbitration, 221

non-payment distinguished from breach of international law, 283 political responses to sovereign defaults in, 24, 30 waiver of right to arbitration, 268 El Salvador, and arbitration clauses in sovereign debt instruments, 161, 165 Eleventh (11th) Amendment, US constitution, 7 England. See United Kingdom equal treatment fair and equitable treatment obligation, 293–97 financial necessity, 95 MFN clauses, 246, 262, 273–78, 314 monetary reform, 69, 71, 74, 82, 95 national treatment clauses, 246, 273–78 partial compensation encouraging collective action, 313–14 quasi-receiverships and preferential payments, 48, 51–53 use of force to compel payment, 34 Estonia, in ICSID arbitration, 222–23 Europe assignment of sovereign debt and EU members, 311 Dominican Republic quasi-receivership, European creditors in, 48, 51, 52 Great Depression, defaults during, 27–29, 105 Latin American defaults in 19th century affecting European creditors, 10 quasi-receiverships involving, 291, 294 US loans to, 26 US state debt defaults in 19th century affecting European creditors 3–4 European Bank for Reconstruction and Development, arbitration clauses, 164 European Court of Human Rights (ECHR) creditor protection before, 182–89 on partial compensation, 302 property, definition of/rights related to, 182–83 European Financial Stability Facility, 15 Eurozone, 15 exclusive and non-exclusive domestic jurisdiction clauses, 260–61, 272 exhaustion of local remedies, 275 expropriation BITs and. See under bilateral investment treaties of contractual rights, 201–06 non-payment distinguished from breach of international law, 280–87 partial compensation for, 301 repudiation of debt as, 287–89

index sovereign defaults regarded as, 278–89 state versus commercial acts, 278–80 failure to pay, 52, 186, 282–83 fair market value for secondary market purchases of debt, 312–15 fair and equitable treatment. See equal treatment Federal Reserve Bank of New York, 124, 127 Feilchenfeld, Ernst, 204, 284, 289–90, 299 Feis, Herbert, 43, 138, 349 Feller, Abraham, 206 financial necessity, 88–102 Argentine default of 2001 and, 88, 98–102 monetary reform and, 66 Russian Indemnity case, 88, 89 Socie´te´ Commerciale de Belgique case, 94–97 state not judge of its own solvency, 96 Findlay, John, Commissioner, 178–79, 204, 265, 267 Finland Great Depression, no default during, 27, 105 World War Foreign Debt Commission and, 107, 112 First World War. See World War I fiscal agent, 51–52, 128, 161 Fischer Williams, John, ix, 35, 149, 323 force majeure, 66, 83, 87, 90, 93–96, 148, 160 Foreign Bondholders’ Protective Council, US, 104 foreign claims commissions, 120, 189–201, 284, 286, 314 Foreign Compensation Act, UK, 195 Foreign Sovereign Immunities Act, US, 122, 124 Fouchard, Philippe, 153 France arbitration clauses in sovereign debt instruments, 160 Association Nationale des Porteurs Français des Valeurs Mobilie`res, 80, 82, 104 Chinese default of 1920s diplomatic efforts, 26 Council of the Ottoman Public Debt, 89 creditor protection in international law, 183–85 currency devaluation, 60, 62, 77 Dawes Loan, 143, 144 debt repudiation during French Revolution, 39 Dominican Republic quasi-receivership, creditors in, 51 monetary reform, 60–68, 77, 180–82 national courts, creditor suits in, 124–25 odious debt, 138–41

355

Russian Revolution, debt repudiation, 38–40 Serbian Autonomous Administrative Council of Monopolies and, 42, 43 on use of force, 30, 34 waiver of right to arbitration, 267–69 World War Foreign Debt Commission and, 106, 107, 108, 115 GCAB (Global Committee of Argentine Bondholders), 16, 17, 19, 105, 211 GDP. See gross domestic product generalia specialibus non derogant principle, 256, 268 generally recognised market value for secondary market purchases of debt, 312–15 Georgia (country), and arbitration clauses, 165 Germany arbitration clauses in sovereign debt instruments, 160 assignment of sovereign debt, 311 Council of the Ottoman Public Debt, 89, 90 creditor organisations in, 105 Interessensgemeinschaft Argentinien e. V., 17 monetary reform, 76 Universal Postal Convention, international arbitration, 141–42 US–German Mixed Claims Commission after WWI, 171 use of force in Venezuelan Preferential case, 30–35, 50 war reparations (after WWI) Allied repayments to US and payment of, 105, 109 Dawes Arbitral Tribunal, 149–50 Dawes Loan, 143–44, 146, 148, 160 Distribution between East and West Germany, 132 international arbitration of, 143–50 London Agreement (1924), 143, 146 Versailles Treaty, xviii, 75, 143, 148 Young Loan, 76, 83, 144–48, 160 Global Committee of Argentine Bondholders (GCAB), 16, 17, 19, 105, 211 global financial crisis and sovereign defaults, 15, 21 gold clauses, 81, 151, 289 good faith requirements for debt restructuring, 295 governing law. See applicable law Great Britain. See United Kingdom Great Depression

356

index

Great Depression (cont.) economic havoc wrought by, 11, 322, 325 Johnson Act and, 27–29 monetary sovereignty cases during, 58 sovereign defaults during, 11, 105, 146 Great War. See World War I Greece arbitration clauses in sovereign debt instruments, 159 assignment of sovereign debt, 310 financial necessity, 94–97 international arbitration of state succession to Ottoman public debt, 130 International Financial Commission of Control, quasi-receivership of, 42, 44–45 Turkish-Greek war (1898), 44 World War Foreign Debt Commission and, 106, 107 Grisanti, Carlos, Commissioner, 179 gross domestic product (GDP) GDP warrant in Argentine debt restructuring, 17 investment as component of, 217 size of sovereign debt market as percentage of, 12 guano, French loans to Peru in exchange for, 138–41 guarantee, 25, 49, 54, 59, 76–80, 83, 87, 139, 145, 152, 163–64, 177, 187, 190, 194, 196, 199, 222–24, 289 Guatemala, creditor suits in national courts, 124 gunboat diplomacy, 30, 50 Guyana, in ICSID arbitration, 222 haircuts Argentina, 16–18, 291 definition, 56 Dominican Republic, US quasireceivership for, 56 London Debt Agreement, 148 Haiti, quasi-receivership in, 42–44, 47 Hall, William, 204 Harding, Warren, US President, 111 Harmon, Judson, US Attorney General, 310 Hay, John, US Secretary of State, 5 Higgins, Rosalyn, Judge, 203 hierarchy of creditor claims, 303 Heavily Indebted Poor Countries Initiative (HIPCs), 222, 311 holdout litigation by non-participating creditors, 122, 128, 313–14, 320 Holland. See Netherlands Hollander, Jacob, 53, 57 Holls, Frederick, 48

Holtzmann, Howard, Judge, 189 Honduras, quasi-receivership in, 42, 43 Hong Kong, and international arbitration of capacity to pay, 154–55 Hoover, Herbert, US President, 26, 107 Hornby, Edmund, Commissioner, 135 Horne, Robert, Chancellor of the Exchequer, 108 Houston, David, US Treasury Secretary, 109 Huber, Max, Judge, 170 Hudson, Manley, Judge, 96 Hughes, Charles, US Chief Justice, 107 Hull, Cordell, US Secretary of State, 116, 301, 303 Hull formula, 116, 301, 303 Hungary arbitration clauses in sovereign debt instruments, 166 creditor protection in international law, 201 ICSID arbitration, 222 international arbitration of state succession to public debts of AustroHungarian Empire, 133–34 monetary sovereignty of Austrian emperor in, 58 World War Foreign Debt Commission and, 107, 112 Hwang, Michael, 230, 231–35 ICANN (Internet Corporation for Assigned Names and Numbers), 154 ICC. See International Chamber of Commerce ICJ. See International Court of Justice ICSID. See International Centre for Settlement of Investment Disputes ICSID Convention. See Washington Convention ILC. See International Law Commission (ILC), Articles on State Responsibility IMF. See International Monetary Fund immunity. See sovereign immunity India, BIT with Mexico, 244 inequitable treatment. See equal treatment inflation, 45, 58, 85, 143, 187 insurance, 98, 201, 298–99 Interessensgemeinschaft Argentinien e. V., 17 interest rate, 9, 36, 89, 91, 107, 111, 116, 119, 194, 200, 299 internal sovereign debt, 13, 74–75, 153, 305 international arbitration, 129–56 arbitration clauses, 157–68 before 20th century, 157–60 1900–1945, 160–62

index after 1945, 162–67 commercial creditors, 163, 165–67 multilateral development banks, 162–64 national courts and decline in, 157, 163, 167–68 sovereign immunity and, 157, 163 capacity to pay, 143–56 creditor protection. See creditor protection in international law Drago–Porter Convention, 37 financial necessity cases, 89 historical cases, modern value of, 14 ICSID. See International Centre for Settlement of Investment Disputes League of Nations proposal regarding, 324–26 monetary reform, cases involving, 73–76 odious debt, 136–43 reluctance of states to commit to, 5–7 state succession cases, 129–34 International Centre for Settlement of Investment Disputes (ICSID), 209–51 advantages of utilising, 211–12 applicable law, 210 arbitration clauses in sovereign debt instruments, 164, 167, 168 Argentine default cases, 18, 98–102 assignment of sovereign debt, 311–12 balancing creditor protection with needs of debtor countries, 326–29 BITs and. See under bilateral investment treaties bundling creditor claims, 276–78 compensation on sovereign debt assignment, 311–12 international law’s philosophy on, 298–301 partial compensation encouraging collective action, 314 composition of tribunals, 209 consequences of arbitration under, 316–23 contesting awards of, 209 definition of investment absence in ICSID Convention, 212, 216 divergence in notions of, 216–18 Salini characteristics, 227–29 sovereign debt as investment, 219–24 typical characteristics and elements, 228–44 Ecuadorian debt cases before, 142 on financial necessity, 98–102 ineffectiveness in dealing with sovereign debt crises, 316 jurisdiction, 212–26 applicable law versus, 211

357

BITs. See under bilateral investment treaties commercial risk sharing, 237–38, 299 commercial undertaking, association with, 242–44 divergence in notions of investment, 216–18 long-term transfer of financial resources, 234–37 objective core of, 227–51 overlapping. See overlapping jurisdiction positive impact on development, 231–34 precedent for, 224–26 sovereign debt as investment, 219–24 specificity of connection to ICSID, 255–57 territorial link, 238–42 typical characteristics and sovereign debt, 228–44 national courts, as viable alternative to ICSID arbitration, 316–29 non-payment distinguished from breach of international law, 282–83 restructurings, leeway allowed for, 297 standing to sue before, 218 types of claims, 211 waiver of right to arbitration, 270–72 International Chamber of Commerce (ICC) BIT provisions, 210 capacity to pay, 152–55 International Claims Settlement Act, US, 120, 192–93, 195, 306 International Court of Justice (ICJ) on Drago Doctrine and Drago–Porter Convention, 36, 38 on monetary reform, 59, 68 on state of nationality’s rights, 263 international courts and tribunals, historical prominence in default cases, 9 international investment law BITs. See bilateral investment treaties compensation in, 298–315 creditor protection in, 201–06 definition of investment. See under International Centre for Settlement of Investment Disputes (ICSID) ICSID. See International Centre for Settlement of Investment Disputes property and investment, synonymity of, 183 speculation, 303–08 international law balancing creditor protection with needs of debtor countries, 326–29

358

index

international law (cont.) League of Nations International Loans Tribunal, 324–26 limited role in resolution of sovereign debt crises, 19–20 public and private international law, sovereign default at intersection of, 21 responsibility under, defaults triggering. See international responsibility and sovereign default International Law Commission (ILC), Articles on State Responsibility contractual versus treaty causes of action, 258–59 financial necessity, 88, 99–102 International Loans Tribunal, 324–26 International Monetary Fund (IMF) assignment, 309 ICSID arbitration, consequences of, 319, 321, 323 Sovereign Debt Restructuring Mechanism (SDRM), 21, 325 international responsibility and sovereign default, 273–97 coercive debt restructurings, 289–93 expropriation, defaults as, 278–89 fair and equitable treatment obligation, 293–97 national and MFN treatment, 273–78 non-payment distinguished from breach of international law 280–87 repudiation, 287–89 Internet Corporation for Assigned Names and Numbers (ICANN), 154 investment, characteristics of, ICSID jurisdiction commercial risk sharing, 237–38, 299 long-term transfer of financial resources, 234–37 objective core, 227–44 positive impact, 231–34 territorial link, 238–42 two-step test, 215 investment law. See international investment law Iran–US Claims Tribunal, creditor claims before, 170, 187–89, 298, 315 Iraq debt reduction following US invasion, 40 international arbitration of state succession to Ottoman public debt, 130 loan sanctions against, 29 non-payment distinguished from breach of international law, 283

Italy Argentine sovereign default, impact on, 15–19, 40 on balancing creditor protection with needs of debtor countries, 328 Council of the Ottoman Public Debt, 89 creditor organisations in, 105 Associazione per la Tutela degli Investitori in Titoli Argentini (TFA), 16 creditor protection in international law, 190, 191 Dawes Loan, 143 national courts, creditor suits in, 121, 122 use of force in Venezuelan Preferential case, 30–35, 50 World War Foreign Debt Commission and, 106, 107, 108, 115–16 Jamaica, creditor suits in national courts, 125–26 Japan monetary reform, 80–84 Japan–South Korea BIT, 244 Jay Treaty, 157 Jessup, Philip, 36, 106, 271 Je`ze, Gaston, 308 Johnson Act, US, 27–29 Juare´z, Benito, Mexican President, 173 judgment or participating creditors, rate of recovery by, 121, 128 jurisdiction extraterritorial, 69, 71, 192, 250 ICSID. See overlapping jurisdiction prescriptive, 223 private and public international law, sovereign default at intersection of, 21 ratione loci, 247 ratione materiae, 212 ratione personae, 185 ratione temporis, 185 UNCITRAL, 236 Kellogg, Frank, US Secretary of State, 107 Kirchner, Nestor, Argentine President, 16, 40 Kolo, Abba, 205 Lagergren, Gunnar, Judge, 315 Lammasch, Heinrich, Austrian Chancellor, 32 Latin America Monroe Doctrine, 31, 35, 55 nineteenth century sovereign bond issuances and defaults, 10

index use of force to compel repayment, opposition to, 22, 37–38 Latvia World War Foreign Debt Commission and, 112 Lausanne, Treaty of, 129–132 Lauterpacht, Hersch, Judge, 36, 72–73, 172, 259, 301 League of Nations, 114, 130, 159, 160–61, 287–89, 324–26 Lebanon, international arbitration of state succession to Ottoman public debt by, 130 Leffingwell, Russell, 109 legal framework for sovereign debt, 296 legitimate expectations, 294–95 lending into arrears policy, 319 lex specialis principle, 255, 269 Ley 26017, 18, 289–290, 296 Liberia, and World War Foreign Debt Commission, 106, 107 Lillich, Richard, 303 Lipstein, Kurt, 264 Lithuania World War Foreign Debt Commission and, 112 Little, Claims Commissioner, 178, 265, 270 Lloyd George, David, British Prime Minister 108, 113 loan loan sanctions, 27–29, 39 ‘loans’, ‘bonds’, synonymity , 58 Lodge, Henry Cabot, US Senator, 6 London Club, consent of creditors to restructuring agreement in, 152 London Court of International Arbitration (LCIA), on arbitration clauses, 165–67 London Debt Agreement (1953), 76–80, 147–49, 151–52 long-term transfer of financial resources, ICSID jurisdiction, 234–37 lump-sum agreements, 120, 193, 196, 285, 302 Luxembourg, in ICSID arbitration, 249 Mallarme´, Andre´, 34 market value, 185, 300, 302, 304, 312–15, 312–15 Marshall Plan, 97 Martens, Fedor de, 32 mass claim maturity, debt of. See debt Maximilian of Habsburg, Mexican Emperor, 30, 174 Mellon, Andrew, US Treasury Secretary 114, 117

359

Mellon Bank, 126 Mexico assignment of sovereign debt, 311 on balancing creditor protection with needs of debtor countries, 327 Calvo Clauses, 266 coercive restructuring, 289 compensation on sovereign debt, 303, 304, 311 creditor protection in international law, 173–74 directness criterion affecting creditor protection, 170–71 fair and equitable treatment obligation, 291, 294 India–Mexico BIT, 244 Maximilian of Habsburg, ruler, 30, 174 monetary reform, cases involving, 180–82 non-payment distinguished from breach of international law, 282 political responses to sovereign defaults in, 22, 30 MFN (most favoured nation) clauses, 246, 262, 273–78, 314 MIGA (Multilateral Investment Guarantee Agency), on arbitration clauses, 164 military interventions. See war ń, Miguel, Mexican general, 173 Miramo mixed claims commissions creditor claims before, 171–182 decline after WWII, 120 foreign claims commissions versus, 120 monetary reform cases, 134–181 non-payment distinguished from breach of international law, 283–84 on political responses to sovereign default, 22, 31 waiver of right to arbitration in, 263–270 Monaco, and US state debt default suit, 7 monetary reform, 58, 59, 64 applicable law in, 63–64, 68 Canevaro Brothers case, 73–75 conciliation, 80–84 equal treatment and, 69, 71, 74, 82, 95 gold clauses, 81, 151, 289 mixed claims commissions, cases before, 134–181 monetary sovereignty, 58 Norwegian Loans case, 59, 68 repudiation, 289 restructuring of debt and, 58 Serbian Loans and Brazilian Loans cases, 59, 60–68, 70, 72, 81, 86, 98 state succession cases, 134–36 Young Loan case (arbitration), 76, 83 monetary sovereignty, 58 monetary values, historical, xviii

360

index

Monroe Doctrine, 31, 35, 55 Moore, John Bassett, 48–53 moral hazard, 25 moratorium, 88–89, 123, 146, 327–28 Moriaud, Paul, 45 most favoured nation (MFN) clauses, 246, 262, 273–78, 314 Mouharem Decree, 89, 159 Mourawieff, Judge 32 multilateral development banks. See also specific institutions arbitration clauses in sovereign debt instruments, 162–64 assignment of sovereign debt, 309 ICSID arbitration and funding from, 319 Multiple Currency Exchange Guarantee, London Debt Agreement, 76–80 NAFTA (North American Free Trade Agreeement), 239, 244 Napoleonic Wars, 160 national courts, 121–28 arbitration clauses, decline in, 157, 163, 167–68 Argentine debtholders resorting to, 18 on balancing creditor protection with needs of debtor countries, 328 champerty (purchase of debt with intent to sue), 127 on coercive restructuring, 291–92 holdout litigation by non-participating creditors, 122, 128 ICSID arbitration jurisdiction of national courts versus, 255 as viable alternative to domestic suits, 14, 20 participating creditors, rate of recovery by, 121, 128 as proper forum for sovereign debt crises, 337, 344 shift of locus from international arbitration to, 8 US state debt default suits, 7 national law contractual versus treaty causes of action, 255–59 exclusive and non-exclusive domestic jurisdiction clauses, 260–61 League of Nations International Loan Tribunal, 324–26 national settlement institutions creditor organisations, 16, 103–05, 277 See also specific groups foreign claims commissions, 120, 189–201, 284, 286, 314

World War Foreign Debt Commission, US. See World War Foreign Debt Commission national treatment clauses, 246, 273–78 negotiorum gestio, 32–34 net of default risk method of calculating compensation on sovereign debt, 313 Netherlands Dawes Loan, 143 League of Nations International Loan Tribunal proposal instigated by, 324 Vereeniging voor den Effectenhandel, 104 Nicaragua arbitration clauses in sovereign debt instruments, 162 quasi-receivership in, 43 World War Foreign Debt Commission and, 107 Nielsen, Fred, Commissioner, 170, 203 Niemeyer, Otto, Bank of England Governor, 325 nominalism, 62 non-exclusive and exclusive domestic jurisdiction clauses, 260–61, 272 non-participating creditors, holdout litigation by, 122, 128, 313–14, 320 non-payment distinguished from breach of international law, 280–87 Norman, Montague, Bank of England Governor, 108 North American Free Trade Association (NAFTA), 239, 244 Novacovich, Judge, 63 odious debt international arbitration of, 136–43 loan sanctions and, 29 Olney–Pauncefote general arbitration treaty, 5 Ottoman Empire. See Turkey overlapping jurisdiction, 252–72 contractual versus treaty causes of action, 253–59 exclusive and non-exclusive domestic jurisdiction clauses, 260–61, 272 specificity of connection to ICSID, 255–57 unity of contractual bargain, preserving, 261–62 waivers. See waiver of right to arbitration Paez, Venezuelan President, 180 Pakistan, and waiver of right to arbitration, 269 Palestine (before WWII), and international arbitration of state succession to Ottoman public debt, 130

index Palmerston, Henry John, British Prime Minister, 23–25 Palmerston Doctrine, 23–25, 181 Panama, arbitration clauses and independence from Colombia, 158–59 Panama Canal, 158–59 Paraguay compensation on sovereign debt, 300 ICSID arbitration, 236 Paris Club assignment of sovereign debt, 310, 311 consent of creditors to restructuring agreement, 152–53 ICSID arbitration, consequences of, 321, 322 Iraqi debt reduction following US invasion, 40 national courts, creditor suits in, 123 Parmentier, Jean, 108 Parra, Antonio, 215 partial compensation on sovereign debt, 301–03 collective action, encouraging, 313–14 precedent for, 314–15 speculation, sovereign debt instruments viewed as, 303–08 in state practice, 302–03 participating creditors, rate of recovery by, 121, 128 Paul, Claims Commissioner, 267 PCIJ. See Permanent Court of International Justice Pennsylvania, state default of (1837), 3 Permanent Court of International Justice (PCIJ) arbitration clauses in sovereign debt instruments, 161 on compensation on sovereign debt, 300 on financial necessity, 94–97 League of Nations International Loan Tribunal, 323, 325 on monetary reform, 59–68 odious debt, 138–41 on state of nationality’s rights, 263 Peru arbitration clauses in sovereign debt instruments, 160 monetary reform, 73–75 national courts, creditor suits in, 126–28 odious debt, 138–41 Pie´rola dictatorship, 73, 138–40 Pessoa, Epitaćio, Judge, 63, 65 Philippines ICSID arbitration, 215, 249 non-payment distinguished from breach of international law, 283 waiver of right to arbitration, 269

361

´las de, Peruvian President, 73, Pie´rola, Nico 138–40 Poland arbitration clauses in sovereign debt instruments, 166 creditor protection in international law, 196 non-payment distinguished from breach of international law, 286–87 repudiation, default regarded as, 289 social insurance funding under Versailles Treaty, 149–50 World War Foreign Debt Commission and, 107, 112 political responses to sovereign defaults balancing creditor protection with needs of debtor countries, 326–29 diplomatic interventions and settlements, 26, 38–40 discretionary role of creditor governments, 22–26 function control of sovereign debt claims by creditor governments, 23 international arbitration, reluctance of states to commit to, 5–7 loan sanctions, 27–29, 39 to US state defaults, 3–7 use of force to compel repayment, 22, 29–38, 49, 50 Portugal, arbitration of odious debt under Universal Postal Convention by, 141–42 positive impact on development, 231–34 posterior tempore, potior iure principle, 268 Poyais (fictitious Latin American country), 10 preferential treatment. See equal treatment private and public international law, sovereign default at intersection of, 21 private creditor organisations, 16, 103–05, 277. See also specific groups Prodi, Romano, Italian Prime Minister, 40 promissory note, 13, 123–24, 152, 219, 222–23, 225, 233, 236, 247–49, 284, 315 property ECHR, 182–83 expropriation of contractual rights, 201–06 investment and property, synonymity of, 183 repayment rights not regarded as, 281 public and private international law, sovereign default at intersection of, 21 public international law. See international law Puerto Rico and sovereign default by Spain, 25

362

index

Qatar, on arbitration clauses, 165 quasi-receiverships for highly indebted countries, 42–47 Dominican Republic, 43, 47 arbitration of SDIC debts, 49–52 European creditors in, 48, 51, 52 loss of priority by SDIC, 52–53 private fiscal control by SDIC, 47–49 US receivership, 52–57 Egyptian Caisse de la Dette, 42, 44, 46–47, 51 Greece, International Financial Commission of Control in, 42, 44–45 Haiti, 42–44, 47 Honduras, 43 Nicaragua, 43 Serbia, 44 Turkey, 42 Quintana, Moreno, Judge, 70 Read, John, Judge, 70–71 receivership. See quasi-receivership for highly indebted countries repayment rights, character of, 281 repudiation of debt American Revolution, 32–34 default as repudiation, 280–89 Dominican Republic and SDIC, 49 as expropriation, 287–89 French revolution, 39 Russian revolution 1917, 28, 39 US Civil War, 3–7 in war. See under war res judicata, 96 responsibility, international. See international responsibility and sovereign default restructuring sovereign debt, 14–19 Argentine default of 2001, 15–19 collective action clauses (CACs), 15, 21 coercive restructurings, 289–93 consent of all creditors to, 152–53 defined, 14 expropriation, default regarded as, 278–89 fair and equitable treatment obligation, 293–97 financial necessity and, 95 holdout litigation by non-participating creditors, 122 monetary reforms resembling, 58 national treatment and MFN clauses, 273–78 quasi-receiverships for. See quasireceiverships for highly indebted countries SDRM, 14–15 risk of default

ICSID jurisdiction and, 234–37 international law’s philosophy on, 298–301 risk sharing, commercial, and ICSID jurisdiction, 237–38, 299 Romania creditor protection in international law, 191, 196 German war reparations and, 150 non-payment distinguished from breach of international law, 284–85 partial compensation for sovereign debt, 314–15 World War Foreign Debt Commission and, 106–07, 112 Roosevelt, Franklin, US President, 29, 104 Roosevelt, Theodore, US, President, 31, 52, 53–55, 159 Roosevelt treaties, 5 Rothschild family, 4, 158 Rumania. See Romania Russia assignment of sovereign debt, 311 compensation on sovereign debt, 306–07 creditor protection in international law ECHR, 183–86 Foreign Compensation Commission (UK), 196–99 Foreign Claims Settlement Commission (US), 191–93, 194 debt repudiation following Russian Revolution, 28, 38–40 financial necessity in Russian Indemnity case, 88–89 ICSID arbitration, 222–23 Johnson Act, Soviets regarded as in default under, 28 repudiation, default regarded as, 288 Turkey, War of 1878 with, 91 on US state debt default, 6 World War Foreign Debt Commission and, 106, 107 Rwanda–US BIT, 234 Sacerdoti, Giorgio, 203, 246, 247 Santo Domingo Improvement Company (SDIC). See Dominican Republic, under quasi-receiverships for highly indebted countries Say, Jean Baptiste, 8 Schreuer, Christoph, 205, 216, 231, 240, 283, 294 Schwebel, Stephen, Judge, 279 SDIC (Santo Domingo Improvement Company). See Dominican Republic, under quasi-receiverships for highly indebted countries

index SDRM (Sovereign Debt Restructuring Mechanism), 14–15 Second Hague Peace Conference and Convention, 37, 69, 70 Second World War. See World War II secondary market, 312–15 Securities Act of 1933, US, 104, 242 Serbia assignment of sovereign debt, 310 Autonomous Administrative Council of Monopolies in, 42 monetary reform, cases involving, 60–68 World War Foreign Debt Commission and, 106, 107 Serbia and Montenegro, in UNCITRAL arbitration, 221 Seychelles, in ICSID arbitration, 221 Slovakia, in ICSID arbitration, 219–20, 224–26, 233, 239–40 Slovenia, and creditor protection in international law, 187 Smith, Adam, 9 Smoot, Reed, US Senator, 107 social insurance funding under Versailles Treaty, 149–50 Socobelge, 94–97 South Korea-Japan BIT, 244 sovereign bankruptcy proposals, 14, 20 sovereign bonds, defined and described, 11–14 sovereign debt crises and defaults, 3–21 arbitration of. See international arbitration balancing creditor protection with needs of debtor countries, 326–29 character of sovereign debt, 11–14 compensation on. See compensation on sovereign debt creditor protection. See creditor protection in international law financial necessity as defence to. See financial necessity global financial crisis and, 15, 21 international courts and tribunals, historical prominence in default cases, 9 international responsibility and. See international responsibility and sovereign default League of Nations International Loan Tribunal, 324–26 monetary reform and. See monetary reform national settlement institutions for. See national courts; national settlement institutions

363

non-payment distinguished from breach of international law, 280–87 overlapping jurisdiction of. See overlapping jurisdiction as perennial problem in sovereign lending, 8–11 political responses to. See political responses quasi-receiverships. See quasi-receiverships for highly indebted countries restructuring. See restructuring sovereign debt US state debt defaults, 3–7 Sovereign Debt Restructuring Mechanism (SDRM), 14–15 sovereign immunity arbitration clauses in sovereign debt instruments and, 163 11th amendment (state sovereign immunity), 7 Foreign Sovereign Immunities Act, US, 122, 124 restriction on sovereign immunity from jurisdiction, 121 waivers of, 152 sovereignty, monetary, 58. See also monetary reform Soviet Union. See Russia Spain Mexican revolution 173 political responses to sovereign defaults in, 24 speculation, 303–08 standing to sue before ICSID, 218 national claims commissions, 194–95 state practice on compensation for sovereign defaults, 302–03 State Responsibility, ILC Articles on. See International Law Commission (ILC), Articles on State Responsibility state succession arbitration clauses in sovereign debt instruments (Panama’s independence from Colombia), 158–59 assignment of sovereign debt, 310 creditor protection in international law, 187 international arbitration of cases involving, 129–34 monetary reform, cases involving, 134–36 state versus commercial acts of expropriation, 278–80 states, US federal assumption of debt, 7 monetary reform, state succession cases involving, 134–36

364

index

states, US (cont.) reluctance to arbitrate, 5–7 sovereign defaults by, 3–7 sovereign immunity under 11th amendment, 5–7 Sturup, Arbitrator, 307 Sturzenegger, Federico, 313 succession. See state succession Suez Canal, 24 Sweden, and Dawes Loan, 143 Switzerland creditor organisations in, 105 Dawes Loan, 143 German war reparations, 151–52 monetary reform, case involving, 77 national courts, creditor suits in, 124 waiver of right to arbitration, 269 Taft, William, US Chief Justice 171–82 Taft Treaty, 6 Tanzania, and compensation on sovereign debt, 300 territorial link BITs, 238–42, 247–50 ICSID jurisdiction, 238–42 Tilly, Charles, 8 transformation of business environment, debt restructuring leading to, 296 Transjordan, arbitration of state succession to Ottoman public debt, 130 transparency, lack in debt restructuring, 294–95 treasury bills, 201, 288–89 treaties BITs. See bilateral investment treaties contractual versus treaty causes of action, 253–59 VCLT, 79 Treaty of Lausanne, 129–32 Treaty of Versailles. See Versailles Treaty Tripartite Claims Commission, 59 trustees, and creditor protection before national claims commissions, 195 Turkey assignment of sovereign debt, 310 Council of the Ottoman Public Debt, 89, 129–34, 310 creditor protection in international law, 171 Crimean War, borrowing prompted by, 89 financial necessity in Russian Indemnity case, 89 Greece, war of 1898 with, 44 international arbitration of state succession to Ottoman public debt, 129–34

Mouharrem, Decree of, 89, 159 political responses to sovereign defaults in, 22, 24, 30 quasi-receivership of Ottoman Debt Council, 42 Russo-Turkish War of 1878, 91 as successor state to Ottoman Empire, 130–32 Ukraine arbitration clauses in sovereign debt instruments, 167 ICSID arbitration, 213 umbrella clauses, 253–54 UN Commission on International Trade Law (UNCITRAL) arbitration clauses in sovereign debt instruments, 164–66, 168 BIT provisions, 210 Brazilian bonds, arbitration clauses in, 157 capacity to pay, international arbitration of, 155–56 exclusive and non-exclusive domestic jurisdiction clauses, 260, 261 jurisdiction, 236 sovereign debt as investment, 221 UN Doha Declaration on Financing for Development, 311 UN Security Council Resolution 661, 29 Resolution 1483, 40 unequal treatment. See equal treatment unit of account, sovereign control of, 58 See also monetary reform United Kingdom arbitration clauses in sovereign debt instruments, 157, 160 Argentina–UK BIT, 102 CFB. See Corporation of Foreign Bondholders (CFB), UK Council of the Ottoman Public Debt, 89 creditor protection in international law Foreign Compensation Commission (UK), 195–201 mixed claims commissions, 175 diplomatic protection for bondholders, British policy on, 23–25 Foreign Compensation Act, 195 German war reparations, 143, 147 London Debt Agreement and, 147–49 Mexican revolution, 173 monetary reform, case involving, 77, 134–35 odious debt of Tinoco dictatorship in Costa Rica, international arbitration of, 136–38 Peruvian debt, no diplomatic protection of, 138

index quasi-receiverships and, 42, 47, 51, 52, 54 Russian debt repudiation during Revolution, settlement of, 39 US state defaults and, 4–7 use of force by, 30–35, 50 World War Foreign Debt Commission and, 106–12 United States arbitration clauses in sovereign debt instruments, 161–62 Argentine currency board with US dollar, 60, 61 on balancing creditor protection with needs of debtor countries, 327 BITs Argentina–US, 98–102, 210 Bahrain–US, 244 Model BIT, 244 Rwanda–US, 235 Uruguay–US BIT, 234, 246 compensation on sovereign debt, 298, 303, 304, 305, 306–07, 311, 314–15 creditor protection in international law directness criterion, problem of, 170–71 investment law, 202 Iran–US Claims Tribunal, 170, 187–89, 298, 315 mixed claims commissions, 223 Foreign Claims Settlement Commission (US), 189–95, 284–87 debt repudiation during American Revolution, 39 Foreign Bondholders’ Protective Council, 104 foreign claims commissions, 120 German war reparations and, 143, 146 International Claims Settlement Act, 120, 195, 306 Securities Act of 1933, 104, 242 states. See states, US Universal Postal Convention, international arbitration of odious debt under, 141–42 Uruguay 234, 246 use of force. See war USSR. See Russia Van Eysinga, Willem, Judge, 96 Van Houtte, Hans, 303 Velazquez, Federico, Dominican minister of finance, 56 Venezuela Calvo Clauses, 264–65 compensation on sovereign debt, 307–08

365

creditor protection in international law, 176–77 ICSID arbitration, 219, 223, 236, 247–49 monetary reform, cases involving, 97–98, 180–82 national courts, creditor suits in, 124–25 political responses to sovereign defaults in, 22 Vereeniging voor den Effectenhandel (Netherlands), 104 Vermeule, Adrian, 322 Versailles Treaty Belgian claims for war damages under, 112–13 German war reparations under, xviii, 75, 143, 148 return of pre-war funds invested in Germany under, 90 social insurance funding under, 149–50 Vienna Convention on Succession of States in Respect of State Property, Archives, and Debt, 12, 131, 187 von Steyern, Conciliator, 80–82, 84 waiver of right to arbitration, 262–72 BITs and. See under bilateral investment treaties Calvo Clauses and Calvo Doctrine, 177, 263–66, 269, 271 exclusive jurisdiction clauses, 272 ICSID arbitration, 270–72 investor’s rights versus state of nationality’s rights, 263 mixed claims commission, 263–70 Wa ¨lde, Thomas, 205 war Chile, war between Peru and (1879), 73, 138–40 to compel repayment, 22, 29–38, 49, 50 Crimean War, 89 repudiation American Revolution, 39 Confederacy in US Civil War, 3–4 French Revolution, 39 Russian Revolution, 28, 38–40 Great Depression compared to, 322 Napoleonic Wars, 160 Russo-Turkish War of 1878, 91 Turkish-Greek war of 1898, 44 WWI. See World War I WWII. See World War II Wadsworth, William, Claims Commissioner, 174 Washington Convention. See under International Centre for Settlement of Investment Disputes (ICSID) Weil, Prosper, 213

366

index

Wilson, Woodrow, US President, 108, 109, 113 Wood, Philip, 13 Wordsworth, William, 4, 313 World Bank arbitration clauses in sovereign debt instruments, 162, 164–66 assignment of sovereign debt, 309 fair market value guidelines, 312 ICSID as part of, 319. See also International Centre for Settlement of Investment Disputes World Trade Organization (WTO) dispute settlement mechanism, 326 World War Foreign Debt Commission, 105–20 authority, mandate, composition, and method of operation, 107–08 British settlement, 108–12 capacity to pay, consideration of, 118–19 contemporary relevance of negotiations, 116–20 debts negotiated by, 106, 107 European settlements, 112–16 general cancellation proposals, US rejection of, 109–10, 113, 117 intertwined character of war lending and borrowing, 108 table of debts owed, 106 WWI debt overhang, created to deal with, 106–07 World War I Austro-Hungarian Empire, collapse of, 133–34 Council of the Ottoman Public Debt and, 90–91, 129–34

debt overhang, US World War Foreign Debt Commission created to deal with, 106–07 debt repudiation following Russian Revolution, 38–40 force majeure not triggered by, 66 French currency devaluation, following, 60, 62 German war reparations. See under Germany US–German Mixed Claims Commission after, 171 World War II London Debt Agreement, following Marshall Plan, 97 Universal Postal Convention, international arbitration of odious debt under, 141–42 WTO dispute settlement mechanisms, 326 Wuarin, Albert, 323 Young Loan, 66, 83, 87, 90, 93–96, 148, 160 Yugoslavia creditor protection in international law, 187, 189–90, 193–94, 196 monetary reform, 60–68 non-payment distinguished from breach of international law, 287 Serbian Autonomous Administrative Council of Monopolies, 42, 43 Universal Postal Convention, international arbitration of odious debt under, 141–42 Zamacona, Manuel de, Commissioner, 174 Zettelmeyer, Jeromin, 313

CAMBRIDGE STUDIES IN INTERNATIONAL AND COMPARATIVE LAW

Books in the series

Sovereign Defaults before International Courts and Tribunals Michael Waibel Making the Law of the Sea: A Study in the Development of International Law James Harrison ‘Fair and Equitable Treatment’ in International Investment Law ¨ger Roland Kla Legal Aspects of Transition from Illegal Territorial Regimes in International Law ¨l Ronen Yae Access to Asylum: International Refugee Law and the Globalisation of Migration Control Thomas Gammeltoft-Hansen Trading Fish, Saving Fish: The Interaction between Regimes in International Law Margaret Young The Individual in the International Legal System: State-Centrism, History and Change in International Law Kate Parlett The Participation of States in International Organisations: The Role of Human Rights and Democracy Alison Duxbury Theatre of the Rule of Law: The Theory, History and Practice of Transnational Legal Intervention Stephen Humphreys ‘Armed Attack’ and Article 51 of the UN Charter: Evolutions in Customary Law and Practice Tom Ruys Science and Risk Regulation in International Law: The Role of Science, Uncertainty and Values Jacqueline Peel The Public International Law Theory of Hans Kelsen: Believing in Universal Law Jochen von Bernstorff Vicarious Liability in Tort: A Comparative Perspective Paula Giliker Legal Personality in International Law Roland Portmann Legitimacy and Legality in International Law: An Interactional Account é and Stephen J. Toope Jutta Brunne

The Concept of Non-International Armed Conflict in International Humanitarian Law Anthony Cullen The Challenge of Child Labour in International Law Franziska Humbert Shipping Interdiction and the Law of the Sea Douglas Guilfoyle International Courts and Environmental Protection Tim Stephens Legal Principles in WTO Disputes Andrew D. Mitchell War Crimes in Internal Armed Conflicts Eve La Haye Humanitarian Occupation Gregory H. Fox The International Law of Environmental Impact Assessment: Process, Substance and Integration Neil Craik The Law and Practice of International Territorial Administration: Versailles, Iraq and Beyond Carsten Stahn Cultural Products and the World Trade Organization Tania Voon United Nations Sanctions and the Rule of Law Jeremy Farrall National Law in WTO Law: Effectiveness and Good Governance in the World Trading System Sharif Bhuiyan The Threat of Force in International Law ¨ rchler Nikolas Stu Indigenous Rights and United Nations Standards Alexandra Xanthaki International Refugee Law and Socio-Economic Rights Michelle Foster The Protection of Cultural Property in Armed Conflict Roger O’Keefe Interpretation and Revision of International Boundary Decisions Kaiyan Homi Kaikobad

Multinationals and Corporate Social Responsibility: Limitations and Opportunities in International Law Jennifer A. Zerk Judiciaries within Europe: A Comparative Review John Bell Law in Times of Crisis: Emergency Powers in Theory and Practice ín Oren Gross and Fionnuala Nı´ Aola Vessel-Source Marine Pollution: The Law and Politics of International Regulation Alan Tan Enforcing Obligations Erga Omnes in International Law Christian J. Tams Non-Governmental Organisations in International Law Anna-Karin Lindblom Democracy, Minorities and International Law Steven Wheatley Prosecuting International Crimes: Selectivity and the International Law Regime Robert Cryer Compensation for Personal Injury in English, German and Italian Law: A Comparative Outline Basil Markesinis, Michael Coester, Guido Alpa, Augustus Ullstein Dispute Settlement in the UN Convention on the Law of the Sea Natalie Klein The International Protection of Internally Displaced Persons Catherine Phuong Imperialism, Sovereignty and the Making of International Law Antony Anghie Necessity, Proportionality and the Use of Force by States Judith Gardam International Legal Argument in the Permanent Court of International Justice: The Rise of the International Judiciary Ole Spiermann Great Powers and Outlaw States: Unequal Sovereigns in the International Legal Order Gerry Simpson Local Remedies in International Law C. F. Amerasinghe Reading Humanitarian Intervention: Human Rights and the Use of Force in International Law Anne Orford

Conflict of Norms in Public International Law: How WTO Law Relates to Other Rules of Law Joost Pauwelyn Transboundary Damage in International Law Hanqin Xue European Criminal Procedures Edited by Mireille Delmas-Marty and John Spencer The Accountability of Armed Opposition Groups in International Law Liesbeth Zegveld Sharing Transboundary Resources: International Law and Optimal Resource Use Eyal Benvenisti International Human Rights and Humanitarian Law Rene´ Provost Remedies Against International Organisations Karel Wellens Diversity and Self-Determination in International Law Karen Knop The Law of Internal Armed Conflict Lindsay Moir International Commercial Arbitration and African States: Practice, Participation and Institutional Development Amazu A. Asouzu The Enforceability of Promises in European Contract Law James Gordley International Law in Antiquity David J. Bederman Money Laundering: A New International Law Enforcement Model Guy Stessens On Civil Procedure J. A. Jolowicz Trusts: A Comparative Study Maurizio Lupoi The Right to Property in Commonwealth Constitutions Tom Allen International Organizations Before National Courts August Reinisch The Changing International Law of High Seas Fisheries ã Francisco Orrego Vicun

Trade and the Environment: A Comparative Study of EC and US Law Damien Geradin Unjust Enrichment: A Study of Private Law and Public Values Hanoch Dagan Religious Liberty and International Law in Europe Malcolm D. Evans Ethics and Authority in International Law Alfred P. Rubin Sovereignty Over Natural Resources: Balancing Rights and Duties Nico Schrijver The Polar Regions and the Development of International Law Donald R. Rothwell Fragmentation and the International Relations of Micro-States: Self-determination and Statehood Jorri Duursma Principles of the Institutional Law of International Organizations C. F. Amerasingh

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