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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, Sa˜o 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, Herna´n 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 de´clinatoires 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
Abbreviated 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
Abbreviated 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
Abbreviated 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 Agustı´n 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
Abbreviated 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
Abbreviated 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. Olguı´n 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
Olguı´n 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
Abbreviated 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´ Ge´ne´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´ Ge´ne´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
Abbreviated 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 Te´cnicas 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 Ge´ne´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
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Pages
Compan ı de Aguas del Aconquija S.A. ˜´a 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
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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
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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
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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 (Re´clamation 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
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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
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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
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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
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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
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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
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Abbreviated 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 Ge´ne´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 Ge´ne´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
Abbreviated 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
Abbreviated 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,
Abbreviated citation
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
Abbreviated citation
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
Abbreviated 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 helle´nique 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
Abbreviated citation
Pages
´tat, Andre´ A. G. et al. v France, Conseil d’E No. 229040, 7 January 2004 Association franc¸aise 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
Abbreviated 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
Abbreviated 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 Franc¸ais 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 Nacio´n, 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’Europe´enne 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 Franc¸ais 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 Nacio´n Eternity v Morgan Guaranty (2003)
126, 127
Eternity v Morgan Guaranty (2004)
291, 292
Europe´enne 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
Abbreviated 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 Franc¸aise et le gouvernement de la Fe´de´ration de Russie relatif au re`glement de´finitif des cre´ances re´ciproques entre la France et la Russie ante´rieures au 9 mai 1945 (France–Russia), Journal Officiel de la Re´publique Franc¸aise, 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 Franc¸aise 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
list of abbreviations
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 ge´ne´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 compare´e 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 ge´ne´rale de droit international public Recht der internationalen Wirtschaft Christoph Schreuer, The ICSID Convention: A Commentary, 1st edn (2001)
lv
lvi
list of abbreviations
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.
sovereign debt crises and defaults
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, Panthe´on 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.
sovereign debt crises and defaults
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’).
sovereign debt crises and defaults
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).
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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).
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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.
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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 ´economiques 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).
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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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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.
sovereign debt crises and defaults
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.
18
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.
sovereign debt crises and defaults
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 Nacio´n (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.
20
sovereign defaults
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.
sovereign debt crises and defaults
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 cre´anciers 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.
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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.
political responses to sovereign defaults
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.
political responses to sovereign defaults
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.
28
sovereign defaults
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.
political responses to sovereign defaults
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 ´etrangers, recours individuels et action collective des cre´anciers (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.
30
sovereign defaults
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.
political responses to sovereign defaults
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 Cara´cas] 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.
32
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of England at Cara´cas 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.
political responses to sovereign defaults
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 ve´ne´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 ve´ne´zue´lien’: ‘il semble bien que la the`se qu’elle contient ne soit pas conforme au principe de la paix internationale. ` un pays cre´ancier un privile`ge a` l’e´gard d’autres cre´anciers, 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.
political responses to sovereign defaults
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.
political responses to sovereign defaults
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
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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.
political responses to sovereign defaults
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 Franc¸aise et le Gouvernement de la Fe´de´ration de Russie re´latif au re´glement de´finitif des cre´ances re´ciproques 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
´n entre Kirchner y Prodi surgio ´ el tema de los bonistas’, ‘Nueva York: En la reunio Cları´n, 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.
political responses to sovereign defaults
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.
42
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.
quasi-receivership of highly indebted countries
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.
46
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 cre´anciers, mais bien les gardiens du bien-eˆtre financier de l’Egypte.’ H. Babled, ‘Le Proce`s de la caisse de la dette ´egyptienne 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.
quasi-receivership of highly indebted countries
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.
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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.
quasi-receivership of highly indebted countries
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.
quasi-receivership of highly indebted countries
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’).
quasi-receivership of highly indebted countries
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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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).
quasi-receivership of highly indebted countries
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.
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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.
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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 e´nonce´e 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 preˆte´e, 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 preˆte´es 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 ne´cessaires 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 ´equivalente a` ` son compte l’e´ventualite´ de la perte au change de la monnaie l’or ou a` prendre a franc¸aise, cette stipulation est valable et le de´biteur ne peut pas se pre´valoir du cours force´ pour refuser de l’exe´cuter.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 re´evaluation 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´precie´e’ 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´pre´ciation’ 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´pre´cie´e – 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 Franc¸ais 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 Franc¸ais 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 Besanc¸on (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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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’exe´cuter les The tribunal recognised that ‘l’obligation pour un E ´tat vient a` eˆtre en danger, si traite´s peut fle´chir 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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sovereign defaults
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.
financial necessity
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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 ¨ubiger (Berlin: Berliner WissenschaftsVerlag, 2008), 321.
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sovereign defaults
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.
financial necessity
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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).
98
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).
financial necessity
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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.
financial necessity
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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
104
sovereign defaults
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 Franc¸ais 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 Franc¸aise, 25 May 1928, 5554. Serbian Loans Case, 40ff.
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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.
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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).
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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. Europe´enne 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 Franc¸ais 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 Franc¸ais 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
Europe´enne de Banque v Venezuela (1988). 95 Cre´dit Franc¸ais v Sociedad Financiera de Comercio (1985). IFLR 9 (7) (1985), 39. 97 Cre´dit Franc¸ais 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 Nacio´n, 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 Nacio´n. 103 104 Elliott Associates v Peru. Ibid., 346. Ibid., 351. 107 108 Ibid., 336. Ibid., 338. Ibid., 342. Elliott Associates v Banco de la Nacio´n, 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. Andre´ade`s, ‘Les Obligations financie`res, (Paris: Les E envers la dette publique ottomane, des provinces de´tache´es 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 ´etrangers, recours individuels et action collective des cre´anciers (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 re´el 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 ´Etats 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 subcomisio´n jurı´dica, ´n 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
