The Argentinian financial crisis in 2001 and the entailing legislation provoked a considerable number of ICSID arbitral proceedings. But disputes at the very heart of the crisis, those concerning the Argentinian default on its state bonds, were left to be decided by domestic courts in New York, London or Frankfurt, the jurisdiction of which was based on choice of forum clauses contained in the terms and conditions of the debt instruments.
However, in its recent Decision on Jurisdiction of August 4, 2011, the ICSID arbitral tribunal in the case Abaclat and Others v. Argentine Republic, ICSID Case No. ARB/07/5 (available at: http://italaw.com/documents/AbaclatDecisiononJurisdiction.pdf) held that it has jurisdiction to rule on a dispute concerning Argentina’s sovereign debt restructuring despite the choice of forum clauses. This award is remarkable in two regards: First, it is the first ICISD award concerning sovereign debt restructuring. Second, it is also the first mass arbitration ever, involving on the side of the claimants over 180,000 persons. For the purpose of this article, only the first aspect will be elucidated and the second – despite the interesting questions it involves – left to a later discussion.
A. The facts underlying the dispute are as follows: On December 23, 2001, Argentina publicly announced that it would default on over USD 100 billion of its bond debt denominated in foreign currencies, which were owed to foreign and domestic creditors. In order to restructure its debt, Argentina made the so-called Exchange Offer 2005: Argentina offered its creditors new bonds either with a lower principal or a lower interest rate. By law of February 11, 2005, the Government was prohibited to re-enter into the exchange process with respect to those bonds that were eligible for the exchange and that were not exchanged though. By February 25, 2005, approximately 75% of all bond holdings participated in the exchange.
On September 14, 2006, a group of 180,000 Italian holders of Argentinian bonds that did not participate in the Exchange Offer 2005 filed a Request for Arbitration with the International Center for the Settlement of Investment Disputes (“ICSID”). They claimed that Argentina had breach the bilateral investment treaty concluded between Argentina and Italy in 1990 (“the BIT”), which contained an ICSID arbitration clause. Due to the large number of claimants, the claim was administered by the Task Force Argenina (“TFA”), an associazione non riconosciuta under Italian law. After Argentina made another exchange offer in 2010, approximately 120,000 claimants withdrew from the arbitration.
B. In its Decision on Jurisdiction of August 4, 2011, the Tribunal (Tercier, Abi-Saab, van den Berg) held that it has jurisdiction over the dispute. It rejected the preliminary objections raised by Argentina concerning its jurisdiction and the admissibility of the claim.
Argentina’s first objection concerning jurisdiction was that the claims raised by the claimants were not “treaty claims”, i.e. that they did not concern a breach of the BIT. According to Argentina, deferring payments due under the bonds was a mere breach of contract, which could not amount to a violation of Argentina’s obligations under the Argentina-Italy BIT (para. 307). However, the Tribunal reasoned that, for purposes of determining jurisdiction, it was not necessary to establish that the BIT was breached. Rather, it only had to establish whether – on the basis of the facts brought forward by the claimants – a breach of the BIT could be established prima facie (para. 311). This prima facie standard would only not apply to the assessment of the facts, but also the “determination of the meaning and scope of the relevant BIT provisions invoked”. The Tribunal found that the facts alleged by the claimants could constitute an unfair and inequitable treatment, an expropriation as well as discrimination (para. 314).
Although the Tribunal agreed that it has no jurisdiction to rule on mere contractual claims, which had to be brought before the state courts having jurisdiction, the claims at stake could not be considered merely contractual. It reasoned that the Emergency Law adopted by Argentina “had the effect of unilaterally modifying Argentina’s payment obligations” (para. 321). Therefore, also the choice of forum clauses in the terms and conditions of the debt instruments were irrelevant (para. 499). It is worth noting that the Tribunal did not discuss Argentina’s argument that the bonds were not governed by Argentinian law (but Swiss or New York law) and that thus the Argentinian legislation was unable to affect the claimants’ rights.
The Tribunal further reasoned that the deferral of payments was not justified by contractual or legal provisions like force majeure. Argentina tried to justify its non-performance by referring to its situation of insolvency. However, the Tribunal was not convinced by this argument since the debt contracts contained no provisions in this regard. Although insolvency could constitute a justification for non-payment under domestic law, this would not apply to the situation at hand: the Tribunal pointed out that Argentina was – by adopting the Emergency Law – acting as a sovereign. No international insolvency regime for States would exist, although the Tribunal acknowledged that some legal principles concerning the insolvency of states had evolved. However, these questions would concern the merits of the dispute and not a matter of jurisdiction (para. 323).
Second, Argentina contested that the dispute arose out of an investment as required by the BIT and Art. 25 ICSID Convention. In particular, Argentina argued that the bonds were subscribed to by certain banks and sold to intermediary banks, which then divided and distributed security entitlements in the bonds to their individual customers (like the claimants). The security entitlements could not be considered an investment. The Tribunal was not convinced by this argument: it found that the security entitlements had no value independent of the bonds; the process of distribution happened electronically, there was no physical transfer of title. But the bonds themselves constituted obligations and thus an investment as defined by the BIT (para. 356). As to Art. 25 ICSID Convention, the Tribunal rejected the so-called Salini criteria and contented itself by finding that there was an investment in the sense of the ICSID Convention because there was a contribution on behalf of claimants. It defined as contribution a value that is protected under the BIT (para. 365).
Argentina raised further objections concerning the specific nature of this dispute. It argued that its consent to arbitration contained in the BIT could not be construed in such a way as to include disput-es concerning sovereign debt restructuring. Since Argentina could have limited the scope of its consent under Art. 25(4) ICSID Convention, but did not so, the Tribunal refuted Argentina’s first contention (It is worth noting that some investment agreements, like for instance the Chile-US FTA, Annex 10-B, limit the scope of the protection to national treatment and MFN as far as debt restructuring is concerned).
In the following, the Tribunal elaborated on the specific procedural questions arising out of the fact that, initially, there were 180,000 claimants and that nearly 120,000 of them had withdrawn from the dispute after the Exchange Offer 2010.
C. The Tribunal’s decision is remarkable in several regards, as has been mentioned in the introductory remarks. Although this arbitration is the first ICISD case on the restructuring of foreign debt and although the jurisdiction of ICSID over such disputes is highly disputed in scholarly writing (an overview is provided by: Michael Waibel, Opening Pandora’s Box: Sovereign Bonds in International Arbitration, 101 Am.J.Int’l L. 711 (2007), available at SSRN: http://ssrn.com/abstract=1566482; id., Sovereign Defaults before International Courts and Tribunals 209-272 (CUP, 2011)), the Tribunal’s findings as to whether the bonds as well as the security entitlements are investments in the sense of the ICSID Convention are rather concise. Despite the fact that the Tribunal argued in favor of a “double barreled” test, which distinguishes between term “investment” used by the BIT and by Art. 25(1) ICSID Convention, it made a “contribution” that is “apt to create the value that is protected under the BIT” (para. 365) the only requirement of an investment under the ICSID Convention. Thus, the Tribunal de facto followed a subjective approach.
Bearing in mind the choice of forum clauses contained in the debt instruments, it first seems awkward that the Tribunal assumed its jurisdiction. However, the Tribunal followed a common distinction between contract and treaty claims. It is well accepted by international tribunals and scholarly writing that the mere breach of a contract between a state and an investor does not amount to a breach of an investment protection agreement. However, in case the State exercises its sovereign powers and no longer acts as a “normal” contracting party, a breach of contract can also constitute a breach of an investment treaty. Although it is not undisputed, most tribunals agree that a choice of forum clause in such a state contract can only affect contractual claims.
Thus, the Tribunal is thus in line with the rulings of other tribunals. However, one may ask whether the Tribunal’s decision is really convincing in this case.
First, the Tribunal’s finding that the dispute prima facie really concerns a breach of the treaty is largely labeling, but no analysis.
Second, the Tribunal’s approach is rather formal. Yes, Argentina enacted a law that prohibited to re-enter into the negotiation process with claimants and thus exercised sovereign powers. But from a legal perspective, the Argentinian legislation had no influence on the rights of the Claimants since a. the debt instruments were not governed by Argentinian law and b. Argentinian courts had no jurisdiction. Argentina’s creditors could still (and did so) seek legal redress in the courts of New York, London or Frankfurt. Thus, the Emergency law merely had internal effects on making-up the mind of the Argentinian state. It can be compared to a decision to default by the Board of Directors in a company directed to its chairman. The formal fact that a law was enacted can – at least in this case – not be decisive whether there was sovereign conduct. On the other hand, in case of Greek state bonds, which confer jurisdiction mostly to the courts of Athens, the situation would be different. A Greek law on debt restructuring would make it impossible to seek redress before the Greece or any other courts.
D. The decision raises several questions as to the future of sovereign debt restructuring. This is even truer in the light of the looming insolvency of Greece and other PIIGS-states (i.e. Portugal, Italy, Ireland and Spain). Will it be possible for States to restructure their foreign debts if the affected creditors can challenge these complex economic measures, which were taken in close cooperation with the World Bank, solely on the basis of legal criteria? Are ICSID Tribunals are really the pertinent forum to decide about sovereign debt restructuring?
Apparently, the Tribunal treated the abovementioned questions only superficially in order to be able to proceed to the merits of the case and to make general statements on sovereign debt restructuring under international law. Although the Tribunal did not accept the objection by Argentina, that it was insolvent, it acknowledged that there are principles under international law that govern the insolvency of states; it announced to discuss these principles during the merits-phase. Thus, one can assume that the Tribunal is aware of the relevance of its ruling for the coming state insolvencies.
Depending on the outcome, the Tribunal could set up criteria that would help to create legal certainty also for States in a state of economic necessity. One has to bear in mind that in the case of Argentina domestic courts in a dozen different jurisdictions have ruled on the admissibility of the Argentinian foreign debt restructuring measures – and thus have implicitly challenged the World Bank’s decisions. A decision on the merits then would not be the end, but the beginning of a new era of foreign debt restructuring – although there are doubts as to whether a Tribunal of three arbitrators is really a legitimate institution to re-define the law of State insolvency. Anyhow: The Tribunal has assumed this great responsibility; it remains to be seen whether it uses its power wisely.
Jan Asmus Bischoff
Dr. Jan Asmus Bischoff studied law at Hamburg University from 2000 to 2005. After his graduation, he worked as a researcher at the Max Planck Institute for Comparative and International Private Law until 2010. In 2008, he completed his Master Degree in International Legal Studies at NYU, School of Law as a Hauser Global Scholar. In 2009, he completed his doctoral thesis on “The European Community and the Uniform Private Law Conventions” under the supervision of Prof. Dr. Dr. hc. Jürgen Basedow. In 2010, he passed the Second State Examination at the Hanseatic Regional Appelate Court, Hamburg. He is currently working as an attorney (Rechtsanwalt) at Luther Rechtsanwaltsgesellschaft, Hamburg in the field of international investment law.