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OPENING PANDORA'S BOX: SOVEREIGN BONDS IN INTERNATIONAL ARBITRATION（3） |
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OPENING PANDORA'S BOX: SOVEREIGN BONDS IN INTERNATIONAL ARBITRATION（3）
As a matter of fact, expropriations often concern contractual rights closely associated with physical property. Nevertheless, although sovereign bonds would fail to meet a requirement for an association with physical property, the legal authority for such a requirement is tenuous. Two mixed-commission cases dealing with sovereign bonds do suggest, however, a distinction between physical and intangible assets; jurisdiction was found only for those sovereign bonds used for public works or services rendered to the government, as opposed to those issued for general budgetary purposes of the issuing country. In Companie Générale des Eaux de Caracas, the commission accepted jurisdiction over Venezuelan bearer bonds, issued to the Belgian claimant CGE, to finance public works. The direct link between bonds issued as payment for property transferred and services rendered to the government overcame the presumption of no *744 jurisdiction. [FN182] In Boccardo, the commission accepted jurisdiction where the claimant had received bonds in exchange for merchandise furnished. [FN183]
Feilchenfeld and Borchard are among the few leading scholars who have examined the international law of public debt in detail. Their views on whether sovereign bonds may be expropriated diverge sharply. Feilchenfeld affirmed such protection. Borchard, by contrast, reserved a "distinct branch[] of the subject" for claims arising out of unpaid sovereign bonds held by the citizens of another country: "[Unpaid bonds] of the State differ in many respects from the contractual obligations arising out of a contract for concessions or the execution of public works." [FN184] He called on arbitral tribunals to decline jurisdiction or to exercise more careful scrutiny than over ordinary contractual causes of action.
Bochard's reservation of a separate category for bonds relates back to the fourth typical feature of an "investment": the association with a commercial undertaking. In this vein, Schreuer highlighted that the "law of expropriation proceeds not from a traditional concept of tangible property but from a broad concept of economic rights that are necessary for the investor to pursue its business successfully." [FN185] Similarly, Wälde and Kolo wrote that "the key function of property is less the tangibility of 'things', but rather the capability of a combination of rights in a commercial and corporate setting and under a regulatory regime to earn a commercial rate of return." [FN186] In this context, modern sovereign bonds are commercial instruments associated with no bundle of rights that would constitute a business venture.
In light of these considerations, it remains to be seen whether ICSID tribunals would qualify sovereign bonds as contractual rights subject to expropriation. Turning away from that threshold question, the following paragraphs deal with the constitutive elements of expropriation.
Despite the broad scope for expropriation, not every type of act resulting in economic loss to the investor amounts to expropriation. Only state acts are susceptible of constituting expropriation, [FN187] and the specific characterization depends thus on whether the state slips into its commercial or sovereign shoes. [FN188]
*745 The restriction to state acts suggests the following analysis. Could a private corporation have successfully carried out a similar restructuring implemented by a country? In other words, did the government use specific regulatory, administrative, or governmental powers in its sovereign bond exchange? Consortium R.F.C.C. v. Morocco held that only unilateral measures taken specifically as an exercise of public authority could give rise to expropriation. A host state acting as a contractual party does not interfere with the normal exercise of the investors' rights, but rather fails to perform the contract. [FN189] Lack of performance does not amount to a treaty breach unless it is proven that the state has gone beyond its role as a mere party to the contract and has exercised the specific functions of a sovereign authority. [FN190]
Traditionally, a measure's being in the public interest and nondiscriminatory was relevant only to its legality or illegality, not to whether it amounted to an expropriation. [FN191] A recent tendency is to regard the lack of public interest and the presence of discrimination as constitutive elements of expropriation, rather than as justifying an expropriatory measure. [FN192] Under this approach, if the exercise of governmental powers is both in the public interest and non-discriminatory, the act in question would not be considered an expropriation, with the consequence that no compensation was due on that basis. [FN193] In national economic emergencies the legitimate scope of governmental measures in the public interest might be greater; hence, economic policy measures adopted in response to financial crises would need to rise to a higher level of intensity to constitute expropriation.
The effect of the act on the investor is another element relevant to expropriation. The case law does not consider a mere default to be expropriation. For example, Waste Management v. Mexico found that the City of Acapulco's failure to pay fees due under a concession contract did not amount to indirect expropriation. [FN194] Even though the investor had lost some of its benefits, it had at all times retained the control and use of its property: "The mere non-performance of contractual obligations is not to be equated with a taking of property, nor (unless accompanied by other elements) is tantamount to expropriation. Any private party can fail to perform its contracts, whereas nationalization and expropriation are inherently governmental acts." [FN195] The tribunal observed that a "failing enterprise is not expropriated just because debts are not paid or other contractual obligations are not fulfilled." [FN196]
*746 In the Olguin case, the claimant had purchased "investment bonds" (certificates of deposit endorsed by a state agency) on which the state subsequently defaulted. [FN197] In refusing to characterize the default as expropriation, the tribunal noted that the situation merely involved a business loss due to a financial crisis; for expropriation, a teleologically driven action (intent) was required. [FN198] This condition is unusual in ICSID case law. Schreuer noted that the "context suggests that the Tribunal's point was that mere nonpayment of a debt does not constitute an expropriation .... [I]t is also possible that what the Tribunal meant was simply that there had to be some positive action rather than a mere omission." [FN199]
There are other cases to much the same effect. In SGS v. Philippines, which concerned claims for outstanding payments, the tribunal held that a "mere refusal to pay a debt is not an expropriation of property, at least where remedies exist in respect of such a refusal." [FN200] In CMS v. Argentina, the claim of expropriation was rejected since CMS had retained "full ownership and control" over its shares in Transportadora de Gas del Norte, notwithstanding their diminished value. [FN201] As far back as 1868, the U.S.-Mexico Claims Commission held that the failure to fulfill the obligations of a bond issued for supplies was not an "injury to ... property." [FN202] This line of cases suggests that a default on a sovereign bond does not qualify as expropriation, because it does not extinguish the bondholder's rights under the bond.
There is hence ample authority that failure to pay a sovereign bond does not engage the state's international responsibility, even if it constitutes a default under the bond. [FN203] If governments act as arm's-length contract parties, there can be no expropriation. Feilchenfeld highlighted this crucial caveat:
[A]s international law stands to-day, a debtor state commits an international delinquency by annihilating a debt entirely through repudiation, confiscation, of virtual destruction (interference with the substance of the debt), but ... international law has not yet reached the point where all lesser acts causing defaults and damage to creditors give rise to legal protests based on international law. [FN204]
Argentina's debt restructuring might go beyond mere default. Ley 26017, which prohibits reopening the debt restructuring, is most certainly a state act that interfered with existing contractual rights, independently of whether the default, as well as other restructuring measures, had been private. [FN205] The key question is whether Ley 26017 was incidental to the sovereign *747 debt restructuring and served primarily as a means to enhance the credibility of the exchange offer or, alternatively, whether that legislative act aimed directly at abrogating the rights of uncooperative bondholders.
Forceful restructuring measures could constitute expropriation. [FN206] Ley 26017 could thus be coercive. Repudiation of sovereign bonds would amount to expropriation, as it aims at extinguishing bondholders' claims permanently. [FN207] In this vein, Lauder v. Czech Republic affirmed that effective neutralization of the enjoyment of property amounts to indirect expropriation. [FN208] Postponing payment indefinitely, such as a declaration or legislation never to service a particular series of bonds in the future, could constitute expropriation. [FN209] Ley 26017 did not, however, declare that an entire series of bonds would never be serviced. The law functioned, instead, as an incentive device to encourage participation in the bond exchange, which purposefully discriminated against those bondholders who considered a holdout strategy. Traditionally, international law frowns upon discrimination by nationality, and such discrimination would automatically trigger internationally liability. Ley 26017, however, is a discriminatory measure of a very different kind. That discrimination is directed against holdout creditors. Whether this particular form of discrimination violates international law depends on whether international law requires countries to treat all creditors equally. It is at least doubtful, however, that international law incorporates such a general equal treatment obligation, over and above an obligation not to discriminate against creditors by nationality. The better view is that restructuring measures trigger international liability only insofar as this type of discrimination becomes coercive. [FN210]
In case expropriation is to no avail, the treaty obligation of fair and equitable treatment could be a promising avenue for holders of Argentine bonds. The following, concise review will focus on the most germane aspects of the case law on this treatment standard, while leaving other important issues (such as the international minimum standard of treatment) unaddressed. [FN211]
*748 Fair and Equitable Treatment
The inclusion of a fair and equitable treatment obligation is a regular feature in newer BITs. Nevertheless, due to its level of abstraction, the standard is surrounded by considerable fog. More than for other treatment standards, the particular circumstances of each case shape its interpretation. In this sense, it is relative. Judicial decisions that identify typical fact situations therefore play a central role. [FN212] From the case law, Schreuer identified four typical fact situations: (1) transparency and the protection of the investor's legitimate expectations, (2) freedom from coercion and harassment, (3) procedural propriety and due process, and (4) good faith.
In contrast to the MFN and national treatment standards, the fair and equitable treatment standard is independent of other nationals' treatment. Discrimination is therefore no precondition for breach. The next six paragraphs provide a brief overview of the case law on fair and equitable treatment.
In the ELSI case, the International Court of Justice (ICJ) held that Palermo's mayor, by requisitioning the U.S.-owned company ELSI in response to its straight course toward insolvency, did not violate the clause in the 1948 U.S.- Italy Treaty of Friendship, Commerce and Navigation that prohibited arbitrary or discriminatory measures. Subsequent awards relied on ELSI's use of the principle of arbitrariness as a means of interpreting the fair and equitable standard: "Arbitrariness is not so much something opposed to a rule of law, as something opposed to the rule of law .... It is wilful disregard of due process of law, an act which shocks, or at least surprises, a sense of juridical propriety." [FN213]
The ICSID tribunal in the Genin case refused to find a breach of the fair and equitable standard arising out of the Estonian Innovation Bank's purchase of an Estonian bank branch whose license had been withdrawn (subsequent to the purchase) because of alleged discrepancies in the branch's balance sheets. The test for breach of the standard was whether there were "acts showing a wilful neglect of duty, an insufficiency of action falling far below international standards, or even subjective bad faith." [FN214] This test was not met in Genin since Estonia, despite an element of arbitrariness in removing the branch's license, had ample grounds to intervene to preserve the integrity of its banking system.
A series of cases decided by arbitral tribunals under Chapter 11 of the North American Free Trade Agreement (NAFTA) addresses the standard of fair and equitable treatment. In finding a violation of the standard, the tribunal in Pope & Talbot lowered the threshold for a violation. It dispensed with the requirement that the alleged conduct be "'egregious,' 'outrageous' or 'shocking,' or otherwise extraordinary." [FN215] Instead, the average observer's "surprise[] by what the government has done" is sufficient. [FN216] As the tribunal itself recognized, this interpretation considerably expanded the scope of fair and equitable treatment.
*749 The Mondev tribunal refined Pope & Talbot's holding: "The test is not whether a particular result is surprising, but whether the shock or surprise occasioned to an impartial tribunal leads, on reflection, to justified concerns as to the judicial propriety of the outcome." The tribunal ought to decide "in the light of all the available facts" whether the governmental action was "clearly improper and discreditable." [FN217]
In Loewen, the Canadian claimant alleged judicial improprieties in Mississippi state court. The tribunal found that a "decision which is in breach of municipal law and is discriminatory against the foreign litigant amounts to manifest injustice according to international law." [FN218] Concurring with Pope & Talbot, "bad faith or malicious intention" was not required. Rather, "Manifest injustice in the sense of a lack of due process leading to an outcome which offends a sense of judicial propriety" sufficed to find a breach. [FN219] Emphasizing international law's concern with discriminatory breaches of municipal law, the tribunal held that manifest procedural improprieties tainted the state court's judgment. Hence, "the whole trial and its resultant verdict were clearly improper and discreditable." [FN220]
Waste Management established the principle that the fair and equitable standard is violated if conduct is
arbitrary, grossly unfair, unjust or idiosyncratic, is discriminatory and exposes the claimant to sectional or racial prejudice, or involves a lack of due process leading to an outcome which offends judicial propriety--as might be the case with a manifest failure of natural justice in judicial proceedings or a complete lack of transparency and candour in an administrative process. In applying the standard it is relevant that the treatment is in breach of representations made by the host State which were reasonably relied on by the claimant. [FN221]
On the particular facts, the tribunal held that this test was not met. [FN222]
A leading ICSID case on the predictability of the investment framework in economic crises is CMS v. Argentina, in which the tribunal upheld CMS's claim for violation of the fair and equitable standard. The tribunal noted: "There can be no doubt ... that a stable legal and business environment is an essential element of fair and equitable treatment." And in this particular case, the measures complained of "did in fact entirely transform and alter the legal and business environment under which the investment was decided and made." [FN223]
The CMS tribunal did not require bad faith for violation of the standard. [FN224] What is problematic, however, is the tribunal's view that fair and equitable treatment is an "objective requirement" unrelated to the reasons for the challenged measures. [FN225] This conception is at *750 odds with the requirement to examine such an abstract standard in light of the particular circumstances of the case. In Lauder, by contrast, the UNCITRAL tribunal rightly asserted that the standard is subjective and depends heavily on factual context. [FN226]
Noble Ventures, Inc. v. Romania adopted a different approach. The claimant alleged a breach of the fair and equitable standard because the respondent had initiated the reorganization of the Romanian company Combinatul Siderurgic Resita (CSR). The ICSID tribunal held that "it is difficult to regard either the initiation or the conduct of the judicial proceedings as arbitrary," because CRS was insolvent at the time. In addition, there was no "prospect of ... rescheduling debts .... Such proceedings are provided for in all legal systems and for much the same reasons .... [T]hey were initiated and conducted according to the law .... CSR was in a situation that would have justified the initiation of comparable proceedings in most other countries. Arbitrariness is therefore excluded." [FN227]
In refining the fair and equitable standard, the tribunal in Noble Ventures highlighted the universality of municipal insolvency laws. Recourse to municipal law thus helps to construe the meaning of fair and equitable treatment. By definition, the invocation of a legal procedure that exists in virtually all legal systems cannot be arbitrary. This mode of analysis follows the tradition of private law analogies in international law, pioneered by H. Lauterpacht. [FN228] Similar to the finding in Noble Ventures, if ICSID tribunals readily characterized sovereign debt restructurings initiated by countries in genuine financial distress as arbitrary, the tribunals would be disregarding the generally recognized principle of municipal law that financial distress requires a balancing of creditor and debtor interests. International tribunals owe deference to this common feature, notwithstanding some variations, of municipal insolvency laws.
The UN Conference on Trade and Development endorsed a methodology akin to private law analogies as a means of clarifying fair and equitable treatment: "[I]t is possible to identify certain forms of behaviour that appear to be contrary to fairness and equity in most legal systems and to extrapolate from this the type of State action that may be inconsistent with fair and equitable treatment, using the plain meaning approach." Accordingly, fraudulent acts, capricious discrimination against foreign investors, and unjust enrichment of the state could violate the standard. [FN229]
In summary, the fair and equitable treatment standard, as developed in the case law, protects legitimate commercial expectations. Though the original focus of the standard was on procedure, it has gradually expanded into the substantive realm. The current standard is that governmental acts need to conform to international standards of transparency, nonarbitrariness, due process, and proportionality to the policy aims involved. The newer case law dispenses with the requirement of bad faith. Nevertheless, the case law largely leaves open the question as to the source of the evolving substantive elements of fair and equitable treatment. This indeterminacy leaves the standard only loosely defined and undermines legal certainty. *751 It risks becoming a fallback standard that can be invoked--as the ultimate safety net for investors-- whenever the requirements of all other standards are not met. Noble Ventures, where the content of fair and equitable standard is informed by municipal law, suggests the way forward.
What do these cases mean for sovereign bondholders? The fair and equitable standard could, in practical terms, elevate nonperformance of contractual obligations into treaty breaches. [FN230] Could a sovereign bond default per se breach the standard? The preponderance of the limited case law on this question would reject such de facto elevation. An incidental remark by the ad hoc annulment committee [FN231] in Vivendi v. Argentina suggests as much: "It may be that 'mere' breaches of contract, unaccompanied by bad faith or other aggravating circumstances, will rarely amount to a breach of the fair and equitable treatment standard." [FN232]
In Waste Management the tribunal held that Acapulco did not act arbitrarily since the city found itself in a situation of genuine difficulty: "the persistent non-payment of debts by a municipality is not to be equated with a violation of Article 1105 [fair and equitable treatment], provided that it does not amount to an outright and unjustified repudiation of the transaction and provided that some remedy is open to the creditor to address the problem." [FN233] Similarly, nonparticipating bondholders have the remedy of bringing suit in municipal court.
There is also authority for the opposite view. The tribunal in Mondev suggested that contractual breaches generally violate the fair and equitable standard. [FN234] The SGS v. Philippines decision on jurisdiction left open that possibility. In an offhand remark on the merits, the tribunal suggested that "an unjustified refusal to pay sums admittedly payable under an award or a contract at least raises arguable issues under Article IV [fair and equitable treatment]." [FN235]
Given this limited authority, Schreuer argued that a simple breach of contract is part of normal business risk and does not violate the fair and equitable standard. Willful refusal to abide by contractual obligations, abuse of government authority, and bad faith in the course of contractual performance could well lead to breach. Yet "a breach of contract resulting from serious difficulties on the part of the government to comply with its financial obligations cannot be equated with unfair and inequitable treatment." [FN236] This statement suggests that a sovereign default, provided it was motivated by serious financial difficulties, does not violate the standard.
Even if a default on the sovereign bond does not violate the fair and equitable treatment standard, the implementation of the sovereign debt restructuring could. Corporations in financial distress frequently use bond exchanges. This technique has migrated into the sovereign bond context and become a generally accepted method of restructuring countries' unsustainable debt burden. In some respects, sovereign bond exchanges are intended to avoid breaching legal obligations under the extant bonds (or further breaches where the bonds are already in default). *752 The Argentine bond exchange in 2005 employed this common financial restructuring technique. The following paragraphs examine, with special application to the Argentine debt crisis, six possible justifications for claiming that such a restructuring violates the fair and equitable standard.
First, bondholders might allege that the process of elaborating the bond exchange lacked transparency, undermining their legitimate expectations. [FN237] Transparency enables investors to adapt their business decisions in advance and to comply with the investment framework. Schreuer explained that "[t]ransparency means that the legal framework for the investor's operations is readily apparent and that any decisions affecting the investor can be traced to that legal framework." [FN238]
For sovereign bonds, such a transparency argument is unlikely to succeed. Complex exchanges involving multiple bond series, as well as several currencies and governing laws, require time to design and implement. Argentina set forth the terms and conditions of its exchange offer in detail. While the exchange was offered pursuant to SEC requirements, bondholders might allege that Argentina was never transparent about its payment capacity, which remained shrouded in secrecy. This particular lack of transparency could be a basis for a violation of the fair and equitable treatment standard. Perhaps so, but it is unlikely that Argentine bondholders would have formed a legally protected expectation that Argentina would never carry out a sovereign debt restructuring. The country had restructured its external debt on several occasions in the past (as have many other middle-income countries, in Latin America and beyond), and it had made no assurances, and thereby created expectations, that it would not seek to restructure its debts in the wake of a sovereign debt default.
Second, coercion is a potential source of a claim for fair and equitable treatment. Aggressive sovereign debt exchanges could trigger BIT liability. The existing case law on coercion is sparse. The Pope & Talbot tribunal found that a regulatory verification that involved "threats and misrepresentations" and was "burdensome and confrontational" violated the fair and equitable standard. [FN239] In Tecmed, the tribunal held that a refusal to renew a license-- designed to force the investor to relocate--also violated the standard. [FN240] Bond exchanges are unlikely to violate that standard, however, unless clearly coercive. It would fall upon the claimant to prove elements of coercion in the exchange. As the fundamental basis for claiming a coercive exchange could be contractual, recourse to municipal law might be necessary.
Third, bondholders could take the view that the take-it-or-leave-it exchange offer violated due process. They might assert that the Argentine government did not hear their concerns prior to the elaboration of the final proposal. They could argue that the government adopted a confrontational attitude and did not engage in serious restructuring negotiations. Instead, it arguably opted for unilateral action.
*753 A violation of due process requires that investors' legitimate expectations with respect to the restructuring be disappointed. A government that had at least attempted to restructure its debt obligations consensually and in good faith with a majority of bondholders is likely to fulfill such expectations. At the other extreme, an obligation to engage in potentially lengthy renegotiations when agreement is elusive and when anonymous bondholders are widely dispersed could well be considered unduly burdensome on governments in financial distress.
Fourth, one might argue that the restructuring itself itself was not carried out in good faith. While the bona fide principle is well recognized in international law, assessing whether a specific debt restructuring was carried out in good faith, given the economic circumstances at the time, is complex and requires a detailed examination of the country's payment capacity. A tribunal could not avoid addressing this question. In order to demonstrate the government's bad faith in carrying out the restructuring, bondholders would have to show that the government's unwillingness to pay prompted the restructuring.
Fifth, bondholders could potentially assert a profound transformation of the business environment à la CMS, but it would require logical gymnastics to be able to speak of a "business environment" for sovereign bonds. [FN241] The only conceivable business environment is the entire national economy. To guarantee the stability of this business environment would amount to an impossible promise. Sovereign bonds are general purpose financial instruments, a voluntary alternative to taxation as a means of raising funds for the public treasury. Sovereign bonds are free standing. They do not exist in a business environment.
Sixth, one might argue that the restructuring undermined the legal framework of the sovereign bonds. The legal framework for the typical commercial sovereign bond, however, is a third country's municipal law--a framework over which the debtor country has no control. The law applicable to the bond is outside its reach and remains unchanged. It is therefore difficult to think of measures for restructuring that would affect the stability of the legal framework directly.
Does Ley 26017 [FN242] sufficiently affect that legal framework? Encouraging participation in the exchange might well have been the primary motivation. In that case, the law would serve as a commitment device, underpinning the promise that the first offer will be the final one. Without the law, the exchange might have failed to achieve a high level of bondholder participation. This way of understanding the measure could indicate that the measure was proportionate to the policy aim involved. Nevertheless, Ley 26017 could violate the fair and equitable standard if the law's primary purpose was to abrogate the rights of nonparticipating bondholders.
An assessment of fair and equitable treatment must take a large number of factual elements into account. A central element is that sovereign debt exchanges serve, in part, as a substitute for the lack of statutory mechanisms for sovereign debt restructurings. Bond exchanges are the only viable method for a country--versus a corporation--to restructure an unsustainable debt burden. Incentive features are often critical to the success of a bond exchange. They partially substitute for cramdown powers in insolvency--an accepted element of municipal insolvency *754 law. Unless the use of a bond exchange manifestly discriminates against a minority that is holding out, ICSID tribunals ought to leave considerable leeway to countries in designing their sovereign debt restructurings.
Despite its being a legal principle, the plain meaning of the fair and equitable standard leaves considerable discretion to arbiters in considering just what is equitable. It is a unique treatment standard in that it allows tribunals to perform a comprehensive judicial balancing of investors' and host states' legally protected interests. For sovereign bonds in default, there is thus scope to deny liability if the contrary outcome would be unduly harsh for a country incapable of repaying all its debts. An alternative is to limit the quantum of liability if the country is incapable of repaying all its sovereign bonds.
The next part focuses on the quantum of compensation due. It shows why the legally protected expectation under the four treatment standards is unlikely to correspond to the bond's full face value.
IV. COMPENSATION ON SOVEREIGN BONDS
BITs generally prescribe prompt, adequate, and effective compensation. [FN243] Yet the peculiarities of sovereign bonds traded on secondary markets might warrant a departure from this principle.
International courts and tribunals have repeatedly stressed that property rights and investment protection are no insurance against ordinary commercial risks. [FN244] In the words of the Maffezini and CMS tribunals: "Bilateral Investment Treaties are not insurance policies against bad business judgments." [FN245] In Starrett Housing, the Iran-U.S. Claims Tribunal held that "investors in Iran, like investors in all other countries, have to assume a risk that the country might experience strikes, lockouts, disturbances, changes of the economic and political system and even revolution .... A revolution as such does not as such entitle investors to compensation under international law." [FN246] Similarly, the Saluka tribunal, noting the "serious risks to investing in IPB [a Czech bank]," declined to find an expropriation. [FN247]
Similar considerations apply to sovereign debt crises. BIT protection is no insurance device against default risk on sovereign bonds. [FN248] For purposes of ICSID arbitration, the investor buys with notice of the risks, weighing the probabilities of large profits against the danger of a full or partial loss of principal and interest. A bondholder has no assurances that she will be paid in all states of the world. Seventy-five years ago, Feilchenfeld eloquently captured the *755 philosophy of bondholder protection under international law: "Generally speaking, it might be said that international law will guarantee to the creditor the existence of a debt and of a debtor, but not the existence of a good debt and of a rich debtor." [FN249] The time-honored principle that international law ought not to affect the risk distribution in sovereign debt instruments ex post still stands.
Even relatively carefree investors cannot fail to notice the lack of efficacy in the legal protection of sovereign bondholders. Bond prospectuses contain detailed disclaimers on risk factors. The relatively high interest rate payable on bonds issued by some developing countries is another indicator that the bond purchases involve significant risks. [FN250] Realistic expectations on debt instruments trade off high risk against high return. By judicially curing this fundamental deficiency in creditor protection ex post, courts and international tribunals could create creditor moral hazard. [FN251] Repayment of sovereign bonds, even for those with high default risk ex ante, could effectively be guaranteed. ICSID awards ought not to affect the relative risk properties of various sovereign bonds. Bondholders bear the risk of deteriorating sovereign creditworthiness.
International investment laws protect against frustration of legitimate expectations. [FN252] Favorable macroeconomic conditions are transient, particularly in developing countries, and are subject to inevitable swings in market value. Echoing the Chinn case, [FN253] bondholders, like other creditors, cannot expect to be isolated from financial crises and subsequent sovereign debt restructurings. The reasonable bondholder would have contemplated a full range of possible states of the world. In some, she is going to pocket a sizable profit, in others a small loss, and in some a substantial loss.
In the Kearney case before the U.S.-Mexican General Claims Commission, the umpire held in this spirit: "He [the claimant] entered into the contract of his own accord, fully aware of the condition of the Republic of Mexico and of its ability or otherwise to pay its debts, and trusted to the good faith of the Mexican government." [FN254] The commission well recognized that the bondholder enters such a contract voluntarily, contemplating the up- and downside risks.
*756 When the majority in the Aspinwall case awarded the face value of the Colombian bonds and interest--even though the bonds were never sold for more than 42 percent of face value--the dissent characterized the result as "a total departure from justice" (the 42 percent figure being their "actual price"). [FN255] The U.S. statement of interest in the CIBC Bank case--an important instance of holdout litigation in U.S. courts--came close to suggesting such a standard of compensation in a municipal sovereign debt case: "[sovereign] debt obligations have two values: The original legal contract value and the generally recognized market value." While the United States stopped short of suggesting that nonparticipating creditors--who had purchased their bonds at a 55% discount--should be able to recover only the bonds' secondary-market value and not their full face value, the statement of interest noted that "certain creditors--like Dart-- ... may seek through litigation to benefit from voluntary debt reduction previously agreed to by the commercial banks ... rather than negotiate a restructuring with the debtor in the orderly manner that [is consistent with U.S. foreign policy and evidenced in the] Brady plans." [FN256]
The appropriate standard of compensation in default is the "generally recognized market value" or "fair market value"--which will typically diverge from the bond's face value. This position is buttressed by recourse to the private law principle of unjust enrichment. [FN257] But how should one calculate the generally recognized market value of debt instruments traded on the secondary market? A promising suggestion comes from Sturzenegger and Zettelmeyer: to use the net present value of the old debt after a restructuring, discounted by the yield implicit in the market value of the new debt. [FN258] The rationale behind this method of calculating compensation is to treat nonparticipating creditors as if their bonds had the same probability of repayment as new bonds. The underlying goal is to ensure that international investment law does not guarantee repayment of sovereign bonds without proper consideration of the country's creditworthiness. Nonparticipating creditors are thus exposed to the same default risk as participating creditors. Under this approach to computing compensation, nonparticipating *757 bondholders would not be compensated for the portion of their loss, relative to face value, that is due to default. Crucially, this risk is also borne by participating bondholders.
Nonparticipating bondholders would be compensated, however, for whatever losses might be due to discrimination. At the same time, they would benefit from debt relief provided by participating bondholders. For this reason, the measure of the amount due, calculated as above, represents an upper bound for the legally protected expectation under international law. In practice, compensation due could be lower since that measure does not take into account the improvement in the country's solvency--to which the nonparticipating creditors did not contribute.
This measure of compensation also maintains equal treatment across participating and nonparticipating bondholders. By contrast, preferential treatment of holdout creditors could give rise to MFN claims; for example, complying with an ICSID award requiring payment of the bond's face value could expose a country to BIT claims. Likewise, a large discount on defaulted sovereign bonds would provide strong incentives to initiate ICSID arbitration. In this type of escalating spiral, debt restructurings would quickly unravel.
Secondary-market prices of sovereign bonds tend to collapse when a default is imminent; if a debt restructuring is carried out post default, bond prices will typically have already collapsed. If compensation is based on the bonds' actual value, it is bound to lie substantially below their face value. While "prompt, adequate and effective" compensation for a coercive, post-default restructuring could be minimal, liability for a similar predefault restructuring would be substantially higher. This divergence in potential liability could discourage preventive restructurings designed to avoid default, despite their desirability when a country's debt levels are clearly unsustainable. The following, concluding section sets forth some preliminary observations on how ICSID intervention in sovereign bonds could change the dynamics of future sovereign debt restructurings.
V. POLICY IMPLICATIONS OF HOLDOUT ARBITRATION
Was Du Pont correct to regard international arbitration on sovereign bonds as a Pandora's box? [FN259] Some national judgments have appeared to adopt that view even with respect to municipal litigation--and to avoid adjudicating sovereign debt disputes altogether. [FN260] In recent decades, however, national courts have tended to accept sovereign lending disputes more liberally. [FN261] With ICSID, the pendulum could swing away from dispute resolution in domestic courts according to private law, and toward adjudication by international tribunals largely on the basis of international law. This shift could dramatically limit policy flexibility in sovereign *758 debt crises. For instance, it could hamper the defaulting country's ability to differentiate treatment of creditors according to some criterion of reasonableness. [FN262]
Would the shift to ICSID in sovereign debt disputes increase bondholder protection? In a world where effective protection of foreign bondholders in municipal courts remains by and large elusive, ICSID could serve as a partial substitute for this institutional shortcoming. Consideration of bondholder claims would move further into the adjudicative, and away from the policy, realm. This change could herald a more consistent treatment of similarly situated bondholders across defaulting countries. The threat of actual enforcement could also, over time, expand the sovereign debt market.
Are ICSID enforcement advantages over municipal court judgments illusory or real? ICSID awards arguably take on a more official character. Sovereign debt adjudication would be transformed from a private, into an international, dispute between states; noncompliance with an ICSID award amounts to an international--and very public--breach. [FN263] This change in forum could entail higher reputation costs than ignoring a national court judgment--which could, in turn, hamper the country's future access to financing. Even so, sovereign immunity from execution constrains enforcement of both ICSID awards and national court judgments in similar ways. [FN264]
If sovereign debt disputes come to be commonly arbitrated under ICSID, a variety of mechanisms could change the dynamics of sovereign debt restructurings in unpredictable ways. On average, the number of sovereign debt disputes, along with the size of claims, is likely to increase. Because of the higher expected recovery (in dollars, taking into account the likelihood of repayment), bondholders will be more inclined to hold out and, bundling their claims whenever possible, to seek payment through arbitration. In addition, the threat of ICSID arbitration could, in itself, be a valuable bargaining chip in a demand for payment.
Does ICSID have jurisdiction to determine a country's payment capacity? Determining debt sustainability would be a prerequisite for entertaining claims arising from defaulted sovereign bonds. Financial necessity could also be a circumstance precluding liability. [FN265] Emergency legislation, including debt moratoriums, need to be assessed. Given proper authority and the *759 required methodological tools, [FN266] international arbitral tribunals could adjudicate such disputes. [FN267] At present, however, ICSID tribunals' authority and ability to decide the question of payment capacity seem tenuous.
Are ICSID tribunals an appropriate forum to provide bondholder protection? In current state practice, some central questions in sovereign debt restructurings are addressed in established political forums. The International Monetary Fund, various multilateral development banks, and the Paris Club are important players. Good examples of questions that are routinely decided by these organizations are debt sustainability, the appropriate amount of debt relief, and the nature of financial assistance to be provided. Sooner rather than later, ICSID arbitration on bonds would conflict with these ongoing institutional tasks.
With sovereign bonds, ICSID would enter a novel and difficult terrain. In the past, countries used political means of one kind or another to address unsustainable sovereign debt burdens--with little involvement of national courts or international tribunals. [FN268] Compensation awarded by ICSID tribunals in disputes on public debt could go far beyond what national courts, if they exercised jurisdiction at all, awarded previously. And yet the scope for substantive and enforcement review would be minimal.
There is much room for progressive development of international law on public debt. Current international law provides only minimal protection to sovereign creditors. At the same time, legal machinery to buffer countries against economic and political shocks impairing their payment capacity is largely absent. As a result, sovereign defaults are a perennial source of international tension--as much in 2000 as in 1900. Policymakers and international lawyers have yet to devise viable, long-term solutions.
ICSID arbitration could upset the sovereign debt market's delicate equilibrium. In a world without a legal toolbox for sovereign insolvency, ICSID's focus on creditor protection alone would threaten resolution of future sovereign debt crises. Such a consequence goes against the interests of the creditor majority and also the international community as a whole. Only balanced adjudication of bondholders' and borrowing countries' competing interests will stand a chance of general acceptance and keep the lid firmly shut on this Pandora's box for sovereign finance.
[FN182]. Compagnie Générale des Eaux de Caracas [Belgian Waterworks] v. Venezuela (1903), in THE LAW AND PROCEDURE OF INTERNATIONAL TRIBUNALS, supra note 112, at 78.
[FN183]. Boccardo v. Venezuela (1903), in THE LAW AND PROCEDURE OF INTERNATIONAL TRIBUNALS, supra note 112, at 80.
[FN184]. Edwin M. Borchard, Contractual Claims in International Law, 13 COLUM. L. REV. 457, 460, 476 (1913). The other two categories are (1) claims arising out of contracts between nationals of different countries, and (2) claims arising out of contracts between the a citizen abroad and a foreign government. Similarly, Luis Drago noted in State Loans in Their Relation to International Policy, 1 AJIL 692, 695 (1907), that sovereign bonds are "issued by virtue of the sovereign power of the state, as is its currency." For opposing view (rejecting the distinction promulgated by Borchard), see Aspinwall v. Venezuela (1885), in MOORE, supra note 30, at 3651; D. P. O' CONNELL, STATE SUCCESSION IN MUNICIPAL LAW AND INTERNATIONAL LAW 189 (1967); WILLIAM EDWARD HALL, INTERNATIONAL LAW (6th ed. 1909), at 276 ("Fundamentally, ... there is no difference in principle between wrongs inflicted by breach of a monetary agreement and other wrongs for which the state, as itself the wrongdoer, is immediately responsible."). See also the rejection of various "responsibilit[ies] of states" in Russia v. Turkey (Russian Indemnity), Hague Ct. Rep. (Scott) 298 (Perm. Ct. Arb. 1912), 7 AJIL 178, 188 (1913).
[FN185]. Schreuer, supra note 110, at 24 (emphasis added); Ursula Kriebaum & Christoph Schreuer, The Concept of Property in Human Rights Law and International Investment Law, in HUMAN RIGHTS DEMOCRACY AND THE RULE OF LAW: LIBER AMICORUM LUZIUS WILDHABER 743, 757 (Stephan Breitenmoser et al. eds., 2007).
[FN186]. Waelde & Kolo, supra note 110, at 835 (emphasis added).
[FN187]. Consortium R.F.C.C. v. Kingdom of Morocco, ICSID Case No. ARB/00/6, Award, para. 65 (Dec. 22, 2003).
[FN188]. For example, in Jalapa Railroad & Power Co., (U.S. v. Mex.) (U.S.- Mex. Mixed Cl. Comm'n 1948), in 8 WHITEMAN, DIGEST OF INTERNATIONAL LAW 908 (1967), Am.-Mex. Cl. Rep. 538, 540 (1948), the commission held that a legislative act declaring a particular clause in a contract null and void could not be interpreted as an ordinary breach of contract; rather, the government stepped out of its role as contracting party and, by exercising its sovereign powers, sought to excape its obligations under the contract. To the same effect, see Impregilo S.p.A. v. Islamic Republic of Pakistan, ICSID Case No. ARB/03/3, Jurisdiction, para. 261 (Apr. 22, 2005).
[FN189]. Consortium R.F.C.C. (quoted approvingly in Impregilo, para. 278).
[FN190]. Impregilo, para. 276.
[FN191]. Schreuer, supra note 110, at 1-2.
[FN192]. This argument was accepted in Methanex Corp. v. United States, Final Award, para. 3 (NAFTA Ch. 11 Arb. Trib. Aug. 3, 2005); see Saluka Partial Award, supra note 98, para. 263.
[FN193]. On state responsibility in general, see Stephen M. Schwebel, On Whether the Breach by a State of a Contract with an Alien Is a Breach of International Law, in JUSTICE IN INTERNATIONAL LAW: SELECTED WRITINGS OF STEPHEN M. SCHWEBEL 425, 434 (1994): "[A] State is responsible under international law if it commits not any breach, but an arbitrary breach, of a contract between that State and an alien. What is 'arbitrary'? It is a breach 'for governmental rather than commercial reasons."'
[FN194]. Waste Management, Inc. v. United Mexican States, ICSID Case No. ARB(AF)/00/3, Award (Apr. 30, 2004) [hereinafter Waste Management Award).
[FN195]. Id., para. 174.
[FN196]. Id., para. 177.
[FN197]. Olgufn Award, supra note 96.
[FN198]. Id., para. 84 (unofficial ICSID translation): "Expropriation therefore requires a teleologically driven action for it to occur; omissions, however egregious they may be, are not sufficient for it to take place."
[FN199]. Schreuer, supra note 110, para. 118.
[FN200]. SGS-Philippines Jurisdiction Award, supra note 50, para. 161: "Whatever debt the Philippines may owe to SGS still exists; whatever right to interest for late payment SGS had it still has. There has been no law or decree enacted by the Philippines attempting to expropriate or annul the debt, nor any action tantamount to an expropriation."
[FN201]. CMS Award, supra note 38, paras. 263-64.
[FN202]. J. A. Manasse & Co. v. Mexico (1868), in MOORE, supra note 30, at 3462, 3463.
[FN203]. See supra note 133 and accompanying text. Contra Fedax N.V. v. Republic of Venezuela, ICSID Case No. ARB/96/3, Final Award, para. 29 (Mar. 9, 1998), 5 ICSID REP. 200 (2002), 37 ILM 1391 (1998). Venezuela is bound under international law to pay the promissory notes when due.
[FN204]. Feilchenfeld, supra note 178, at 170.
[FN205]. See supra note 18 for some background on this law.
[FN206]. All private debt restructurings--in the corporate and the sovereign context--rely to some extent on incentives to keep in creditors who consider a holdout strategy. The key question is when such incentive devices become coercive. In assessing coerciveness, it would be reasonable to take into account limited possibilities of enforcement against sovereigns, as well as the absence of restructuring alternatives for countries.
[FN207]. See Certain Norwegian Loans (Fr. v. Nor.), 1957 ICJ REP. 9 (July 6). In dissent, id. at 90, Judge Read cited the French position that sovereign bonds issued abroad "cannot be repudiated without giving rise to a breach of international law."
[FN208]. Lauder v. Czech Republic, Final Award, para. 200 (UNCITRAL Arb. Trib. Sept. 3, 2001), at . See Metalclad Corp. v. United Mexican States, ICSID Case No. ARB(AF)/97/1, Award, para. 103 (Aug. 30, 2000), where the tribunal held that indirect expropriation takes place if "the effect of depriving the owner, in whole or in significant part, of the use or reasonably-to-be-expected economic benefits of property even if not necessarily to the obvious benefit of the host State."
[FN209]. "As long as the debt is omitted from the budget [, virtual destruction is] not treated differently from regular complete repudiation." Feilchenfeld, supra note 178, at 205.
[FN210]. All private debt restructurings--in the corporate and the sovereign context--rely to some extent on incentives to bind in creditors who consider a holdout strategy. The key question is when such incentive devices become coercive. In assessing coerciveness, it would be reasonable to take into account limited possibilities of enforcement against sovereigns as well as the absence of restructuring alternatives for countries.
[FN211]. See Christoph Schreuer, Fair and Equitable Treatment in Arbitral Practice, 6 J. WORLD INVESTMENT & TRADE 357, 360-67 (2005) (highlighting variation in linkage to customary law); Catherine Yannaca-Small, Fair and Equitable Treatment Standard in International Investment Law, in INTERNATIONAL INVESTMENT LAW: A CHANGING LANDSCAPE 73, 81-103 (OECD ed., 2005). IOANA TUDOR, THE FAIR AND EQUITABLE TREATMENT STANDARD IN INTERNATIONAL FOREIGN INVESTMENT LAW (forthcoming 2008) comprehensively covers the case law on fair and equitable treatment.
[FN212]. Schreuer, supra note 211, at 373-74.
[FN213]. Elettronica Sicula S.p.A. (ELSI) (U.S. v. Italy), 1989 ICJ REP. 15, paras. 101, 128 (July 20).
[FN214]. Genin v. Republic of Estonia, ICSID Case No. ARB/99/2, Award, para. 367 (June 25, 2001).
[FN215]. Pope & Talbot Inc. v. Canada, Phase 2, para. 118 (NAFTA Ch. 11 Arb. Trib. Apr. 10, 2001), 7 ICSID REP. 102, available at .
[FN216]. Pope & Talbot Inc. v. Canada, Damages, para. 64 (NAFTA Ch. 11 Arb. Trib. May 31, 2002), 41 ILM 1347 (2002), available at . To the same effect, see ADF Group Inc. v. United States, ICSID Case No. ARB(AF)/00/1, Award, paras. 179-86 (Jan. 9, 2003), 18 ICSID REV. 195 (2003), 6 ICSID REP. 470 (2004).
[FN217]. Mondev International Ltd. v. United States, ICSCID No. ARB(AF)/ 99/2, Award, para. 127 (Oct. 11, 2002), 6 ICSID REP. 192 (2004), 42 ILM 85 (2003) (quoted approvingly in Loewen Group, Inc. v. United States, ICSID Case No. ARB(AF)/98/3, Award, para. 133 (June 26, 2003), 7 ICSID REP. 442 (2005), 42 ILM 811 (2003)).
[FN218]. Loewen Group, para. 135.
[FN219]. Id., para. 132.
[FN220]. Id., para. 137.
[FN221]. Waste Management Award, supra note 194, para. 98.
[FN222]. Id., para. 140.
[FN223]. CMS Award, supra note 38, paras. 274-75.
[FN224]. Id., paras. 274, 281, 284.
[FN225]. Id., para. 280.
[FN226]. Lauder v. Czech Republic, Final Award, para. 292 (UNCITRAL Arb. Trib. Sept. 3, 2001), at .
[FN227]. Noble Ventures, Inc. v. Romania, ICSID Case No. ARB/01/11, Award, paras. 177-78 (Oct. 12, 2005), at .
[FN228]. LAUTERPACHT, supra note 152.
[FN229]. UNCTAD, Fair and Equitable Treatment, UN Doc. UNCTAD/ITE/IIT/11, Vol. III, at 12 (1999).
[FN230]. Schreuer, supra note 211, at 379.
[FN231]. ICSID Convention, supra note 28, Art. 52. ICSID tribunals' final awards may be challenged before an ad hoc committee that has the power to annul the award in certain narrow circumstances (for example, improper constitution of the tribunal, manifest excess of power, corruption of a member of the tribunal, serious departure fom a fundamental rule of procedure).
[FN232]. Vivendi Annulment Decision, supra note 136, para. 101 n.73.
[FN233]. Waste Management Award, supra note 194, para. 115.
[FN234]. Mondev v. United States, ICSCID No. ARB(AF)/99/2, Award, para. 98 (Oct. 11, 2002), 6 ICSID REP. 192 (2004), 42 ILM 85 (2003).
[FN235]. SGS-Philippines Jurisdiction Award, supra note 50, para. 162.
[FN236]. Schreuer, supra note 211, at 380.
[FN237]. Metalclad Corp. v. United Mexican States, ICSID Case No. ARB(AF)/ 97/1, Award, paras. 76, 89 (Aug. 30, 2000) (affirming a violation of fair and equitable treatment on this ground); see Maffezini Award, supra note 165, para. 83; CME Czech Republic B.V. v. Czech Republic, Partial Award, para. 611 (UNCITRAL Arb. Trib. Sept. 13, 2001), at ; Tecmed Award, supra note 168, para. 152.
[FN238]. Schreuer, supra note 211, at 374.
[FN239]. Pope & Talbot Inc. v. Canada, Damages, paras. 68-69 (NAFTA Ch. 11 Arb. Trib. May 31, 2002), 41 ILM 1347 (2002), available at .
[FN240]. Tecmed Award, supra note 168.
[FN241]. The need for such gymnastics is not surprising, given the discussion in part I on why sovereign bonds are unlikely to qualify as "investment" for lack of association with a commercial undertaking.
[FN242]. The law prevents an improved offer to nonparticipating creditors. See supra note 18.
[FN243]. For this "Hull" formula, see SORNARAJAH, supra note 59, at 242-46. Adequacy refers to fair market value. On this notion, see Irmgard Marboe, Compensation and Damages in International Law, 7 J. WORLD INVESTMENT & TRADE 723 (2006). See also AGIP S.p.A. v. People's Republic of the Congo, Award, ICSID Case No. ARB/77/1, Award (Nov. 30, 1979), 1 ICSID Rep. 306, 322 (1993); Liberian Eastern Timber Corp. v. Republic of Liberia, ICSID Case No. ARB/83/2, Award (Mar. 31, 1986), 2 ICSID REP. 346 (1994), 26 ILM 647 (1987).
[FN244]. Reinisch, supra note 176.
[FN245]. Maffezini Award, supra note 165, para. 64; CMS Gas Transmission Co. v. Argentine Republic, ICSID Case No. Arb/01/8, Objections to Jurisdiction, para. 29 (July 17, 2003); CMS Award, supra note 38, para. 244.
[FN246]. Starrett Housing Corp. v. Islamic Republic of Iran, 4 Iran-U.S. Cl. Trib. Rep. 122, 156 (1983 III).
[FN247]. Saluka Partial Award, supra note 98, paras. 55, 275; see Generation Ukraine Inc. v. Ukraine, ICSID Case No. ARB/00/9, Award, para. 20.37 (Sept. 16, 2003), 44 ILM 404 (2005).
[FN248]. For insightful analysis on general risk allocation in international investment law, see William W. Burke-White & Andreas Von Staden, Investment Protection in Extraordinary Times: The Interpretation and Application of Nonprecluded Measures Provisions in Bilateral Investment Treaties, 48 VA. J. INT'L L. (forthcoming 2008).
[FN249]. ERNST H. FEILCHENFELD, PUBLIC DEBTS AND STATE SUCCESSION 657 (1931).
[FN250]. Default risk on a bond is different from the risk sharing that is typical of investments within Article 25 of the ICSID Convention. On this typical element, see supra text accompanying notes 102-03. Risks of the transaction may be held against the investor.
[FN251]. "Creditor moral hazard" refers to the phenomenon in which an implicit repayment guarantee by a third party (the executive, the courts, or an international institution such as the International Monetary Fund) to creditors modifies the relative risk properties of financial instruments ex post, prompting creditors to take on excessive risk ex ante.
[FN252]. "Legal liability ... is the sanction for defeated expectations in law." Edwin M. Borchard, International Loans and International Law, 26 ASIL PROC. 135, 163 (1932). See Consortium R.F.C.C. v. Kingdom of Morocco, ICSID Case No. ARB/00/6, Award, para. 69 (Dec. 22, 2003) ("effets substantiels d'une intensité certaine qui réduisent et/ou font disparaître les bénéfices légitimement attendus de l'exploitation des droits objets de ladite mesure à un point tel qu'ils rendent la détention de ces droits inutile"); Saluka Partial Award, supra note 98, paras. 302-04 ("[the investor's] expectations, in order for them to be protected, must rise to the level of legitimacy and reasonableness in light of the circumstances"); Olguín Award, supra note 96, para. 65(b) ([Olguin] "had his reasons (which this Tribunal makes no attempt to judge) for investing in that country, but it is not reasonable for him to seek compensation for the losses he suffered on making a speculative, or at best, a not very prudent, investment").
[FN253]. 1934 PCIJ (ser. A/B) No. 63 (Dec. 12).
[FN254]. THE LAW AND PROCEDURE OF INTERNATIONAL TRIBUNALS, supra note 112, at 73, 73. Whether a particular bondholder actually knew about the possibility of performance is a matter in equity, not in law. The investment treaty regime does not seek to protect inexperienced retail investors.
[FN255]. Aspinwall v. Venezuela (1885), in MOORE, supra note 30, at 3651, 3664; see Ballistini v. Venezuela, (Fr.-Venez. Comm'n 1903), in VENEZUELAN ARBITRATIONS OF 1903, at 503 (Jackson H. Ralston ed., 1904). As stated in Boccardo v. Venezuela (1903), in THE LAW AND PROCEDURE OF INTERNATIONAL TRIBUNALS, supra note 112, at 80, 80:
It is a principle of public international law that the internal debt of a state, classified as a public debt, which is subject to speculations current amongst that sort of values which are acquired freely and spontaneously at very different rates of quotations which mark great fluctuations of their rise and fall, can never be subject of international claims in order to obtain their immediate repayment in cash.
[FN256]. Statement of Interest of the United States of America in Opposition to the First Amended Complaint in [CIBC Bank & Trust Co. (Cayman) v. Banco Central do Brasil, 886 F.Supp. 1105 (S.D.N.Y. 1995)], as quoted in Philip J. Power, Sovereign Debt: The Rise of the Secondary Market and Its Implications for Future Restructurings, 64 FORDHAM L.R. 2701, 2752 (1996) (emphasis added). In James v. United Kingdom, 98 Eur. Ct. H.R. (ser. A) para. 54 (1986), the European Court of Human Rights similarly pronounced that
the taking of property without payment of an amount reasonably related to its value would normally constitute a disproportionate interference which could not be justifiable under Article 1. Article 1 does not, however, guarantee a right to full compensation in all circumstances. Legitimate objectives of 'public interest', such as pursued in measures of economic reform or measures designed to achieve greater social justice, may call for less than reimbursement of the full market value.
[FN257]. See, e.g., Christoph H. Schreuer, Unjustified Enrichment in International Law, 22 AM. J. COMP. L. 281 (1974).
[FN258]. STURZENEGGER & ZETTELMEYER, supra note 7, at 4-8. They propose this technique for calculating investor losses in restructurings. It could play a similarly useful role in asesssing fair marker value.
[FN259]. See supra note 30.
[FN260]. Courts avoid jurisdiction on the basis of doctrines such as comity or act of state. See generally J. J. FAWCETT, DECLINING JURISDICTION IN PRIVATE INTERNATIONAL LAW: REPORTS TO THE XIVTH CONGRESS OF THE INTERNATIONAL ACADEMY OF COMPARATIVE LAW, ATHENS, AUGUST 1994 (1995). For example, instead of looking at the underlying bond transaction, the Italian Corte di Cassazione, sez. un., 27 May 2005, n.11225, 88 RIVISTA DI DIRITTO INTERNAZIONALE 856 (2005), recently focused on the sovereign acts undertaken in the financial crisis, and declined jurisdiction. The U.S. district court in Allied Bank Int'l v. Banco Credito Agricola de Cartago, 566 F.Supp. 1440 (S.D.N.Y. 1983), aff'd, 733 F.2d 23 (2d Cir. 1984), originally reached a similar result. On rehearing, the circuit court reached the opposite conclusion, 757 F.2d. 516 (2d Cir. 1985).
[FN261]. See, for instance, the cases cited supra note 22, where national courts accepted jurisdiction.
[FN262]. Such discretion is often critical for sovereign debt restructurings. Equal treatment of domestic and foreign creditors might be economically undesirable and infeasible politically. See the persuasive arguments in Anna Gelpern & Brad Setser, What Iraq and Argentina Might Learn from Each Other, 6 CHI. J. INT'L L. 391 (2005). For a more general argument that investment treaty arbitration introduces unprecendented state liability for business losses due to governmental regulation, see GUS VAN HARTEN, INVESTMENT TREATY ARBITRATION AND PUBLIC LAW (2007).
[FN263]. In general, municipal judgments have no binding force outside the forum's jurisdiction. They require recognition. Under the ICSID Convention, supra note 28, Art. 53, such recognition is automatic, without possibility of substantial review.
[FN264]. Id., Art. 55 ("Nothing in Article 54 shall be construed as derogating from the law in force in any Contracting State relating to immunity of that State or of any foreign State from execution.").
[FN265]. See Article 25 of the International Law Commission's Articles on State Responsibility, supra note 154. The Russian Indemnity case, see supra note 184, 7 AJIL at 190, recognized that nonpayment of public debt could be justified in extreme economic and financial circumstances. More recently, the Federal Constitutional Court of Germany denied that a state of necessity could justify the suspension of payment obligations owed to private creditors under sovereign bonds (Joined Case Nos. 2 BvM 1-5/03 & 1-2/06 (May 8, 2007), at < http://www.bverfg.de/entscheidungen/ms20070508_2bvm000103.html>; see case report in this issue by Beate Rudolf and Nina Hüfken). A detailed examination of whether such circumstances potentially preclude liability is beyond the scope of these preliminary observations. For a general overview, see Thomas Pfeiffer, Zahlungskrisen ausländischer Staaten im deutschen und internationalen Rechtsverkehr, 102 ZEITSCHRIFT FUR VERGLEICHENDE RECHTSWISSENSCHAFTEN 141 (2003).
[FN266]. Tools to assess a country's payment capacity are still in their infancy, and opinions differ on the appropriate methodology.
[FN267]. Plans for reorganizing finances of defaulting states through international arbitration have long currency. The arbitrators would need to examine, inter alia, the country's economic conditions, its projected economic developments, and its budgetary situation. ALBERT WUARIN, ESSAI SUR LES EMPRUNTS D'ETATS ET LA PROTECTION DES DROITS DES PORTEURS DE FONDS D'ETATS ETRANGERS 128-29 (1907). Similarly, JOHN FISCHER WILLIAMS, CHAPTERS ON CURRENT INTERNATIONAL LAW AND THE LEAGUE OF NATIONS 327-29 (1929), would require arbitrators to examine carefully the internal needs of the country. See Drago, supra note 184, at 705.
[FN268]. For instance, U.S. crises in the 1830s and the 1870s, post-WWI financial adjustment and the Great Depression, the German debt renegotiation after WWII, the Latin American debt crises of the 1980s, and the East Asian and Russian crises of the 1990s.
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