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Majority opinion in ICSID bondholders claim has broader lessons for defaulting sovereigns, fractured tribunals, shareholder groupings, and would-be claimants needing help getting ICSID claims registered

publication date: Aug 19, 2011
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By Luke Eric Peterson

(Editor's Note: This is article #5 in a series of 5 articles analyzing various aspects of a landmark ICSID ruling in a claim brought by numerous bond-holders. The other articles can be viewed here, here, here and here.)

Only time will tell whether the path blazed by a pair of ICSID arbitrators, Pierre Tercier and Albert Jan van den Berg, in the Abaclat v. Argentina case (formerly known as Beccara v. Argentina) will be followed by other tribunals confronted with claims arising out of sovereign debt defaults and restructurings.

However, taken at face value the majority’s Decision on Jurisdiction and Admissibility has certain lessons for a range of actors.

First, and most obvious, the Decision will be a cause of concern for other states contemplating default and restructuring of their sovereign debt obligations.

Until now, jilted bondholders have had to rely upon the legal forums – typically domestic courts - stipulated in the relevant bonds.

Lately, there have been efforts afoot in corners of the international arbitration community to promote the use of arbitration for disputes arising out of financial instruments. For instance, a working group operating under the auspices of the Permanent Court of Arbitration has been exploring model arbitration clauses that might be inserted into sovereign bonds and other financial instruments.

However, if arbitrators are prepared to hold that international investment treaties present a ready-made path to international arbitration, then many prospective claimants may not need to await the proliferation of such contractual arbitration clauses.

Made-in-Greece solutions could be complicated by international arbitration

The prospect that states may be subject to the jurisdiction of investment treaty tribunals will come as a particular blow for those sovereigns which may have been counting on the flexibility that comes from the fact that many of their outstanding bonds are governed by the law of the issuing state.

In a 2010 analysis of the unfolding Greek sovereign debt crisis, one prominent legal practitioner, Lee Buchheit, observed that Greece enjoys the unusual luxury of being able to make changes to its own laws so as to make the terms of its debt burden less onerous.* (By contrast, governments whose debt-stock is governed by some foreign law would find that any such unilateral legislative changes will fall under review of a, perhaps less sympathetic, foreign court.)

In his 2010 commentary, Mr. Buchheit – who has since become an advisor to Greece – did acknowledge that modifications to Greek debt obligations  - even if they might pass muster under the governing Greek law - might be challenged outside of Greece’s courts, through international arbitration under a bilateral investment treaty. With the recent Decision of the ICSID tribunal in the Abaclat v. Argentina case, this possibility has been become much more vivid.

Now, any financially embattled sovereign will take much more seriously the prospect that they may need to defend against claims brought pursuant to investment treaties. At, the same time, they may re-evaluate their negotiating posture with respect to future investment treaties, so as to clarify whether sovereign debt disputes should fall under such instruments. Indeed, recent U.S. Free Trade Agreements and BITs contain detailed clarifications as to the extent to which sovereign debt transactions fall under the treaty’s protective rubric.

Dissenter’s written opinion still forthcoming

In an unusual twist, the majority’s written Decision on Jurisdiction and Admissibility was not accompanied by the dissenting opinion of the third arbitrator, Georges Abi-Saab. Judge Abi-Saab did not sign the majority decision. Instead the signature cover page indicates: “Dissenting Opinion Forthcoming”.

It is unclear why the majority opinion in the Abaclat case was issued prior to that of Judge Abi-Saab’s, and whether this was a consensual decision of the tribunal. However, the staggered release dates will mean that the majority’s views are digested by arbitrators in other pending bondholder claims against Argentina – and by a wider community of observers - while the written dissent remains in the works.

It remains to be seen whether such a staggered release-point will be followed in other cases at ICSID.

If ICSID is open to mass claims, will individual shareholder claims follow?

One question that arises upon reading the Decision on Jurisdiction and Admissibility is whether the majority’s reasoning may pave the way for other mass claims – including by individual shareholders of companies that have been impacted by sovereign actions.

IAReporter readers will recall that the limits of jurisdiction have been debated in some cases where companies with minority shareholdings– sometimes removed by several layers from the host company investment - have brought claims to ICSID, particularly in cases arising out of foreign direct investments affected by the Argentine financial crisis. Indeed, Argentina has complained, to little avail, that multiple arbitral claims by a multiplicity of indirect shareholders in a single company have the potential to sow legal confusion – particularly where the minority shareholders pursue a litigation strategy that has been disavowed by the majority shareholders of a given company.

While some tribunals have mused as to whether there are outer limits to such claims – for e.g. where a claimant has a particularly modest indirect shareholding – the Abaclat Decision points to the possibility that much smaller-scale (mom and pop) shareholders might be able to band together en masse in order to pursue a litigation strategy which diverges from the desires and objectives of the major (and even minor) shareholder groups.

Use of experts to help get an ICSID case registered

One final point of interest in the August  4, 2011 Decision in the Abaclat case is the revelation that the claimants had enlisted a pair of experts in ICSID arbitration, Rudolf Dolzer and Christoph Schreuer, to buttress their case that ICSID should register their claim.

When Argentina raised objections to the registration of the claim by ICSID in 2006, Prof. Schreuer and Dolzer each prepared legal opinions and letters addressed to the ICSID Secretary-General presenting arguments for the registration of the case.

IAReporter is aware of only one other case where would-be ICSID claimants had sought additional expertise in their efforts to persuade the ICSID Secretariat to register a given claim. In the Anderson and others v. Costa Rica arbitration, the claimants had enlisted the assistance of the Canadian lawyer and arbitrator L. Yves Fortier at the registration phase of the claim.

More broadly, it is unclear how widespread such practice is in ICSID arbitration. However, given that the bar to registration is low, it seems unlikely that the practice is common. (The ICSID Secretary-General is obliged under the ICSID Convention to register cases unless they appear to be manifestly outside of the Centre’s jurisdiction, however, the Abaclat and Anderson cases were unusual in that they both involved multiple claimants – with the latter case having more than 100 claimants.)

* In his co-authored May 2010 commentary, “How to Restructure Greek Debt”, Mr. Buchheit of the Cleary Gottlieb law firm, did caution that no government should “lightly consider a change of local law as an easy method of dealing with a sovereign debt crisis.” Nevertheless, Mr. Buchheit proposed that certain “balanced” and “proportional” legislative steps might be considered by a government in Greece’s position. Any such unilateral legislative initiatives would now be attempted in the shadow of the recent ICSID ruling which affirms for the first time that a state’s restructuring efforts could be reviewed by international arbitrators. (Mr. Buchheit’s law firm is well familiar with the Abaclat case, as the firm advises Argentina on its defence of that ICSID case).

Investment Arbitration Reporter is a specialized news publication tracking developments in the area of international investment law and policy.

The publication does not offer legal or financial advice or recommendations of any kind.
To offer news-tips or comments, email the Editor, Luke Eric Peterson, at: editor@iareporter.com
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Investment Arbitration Reporter is a news & analysis service tracking investor state dispute settlement (ISDS) arbitration claims.

IAReporter helps a broad range of readers - including lawyers, academics and government officials - stay abreast of the latest legal developments and policy trends. We focus primarily on claims launched under investment protection treaties, where foreign investors allege that their host countries have breached international law obligations.

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