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Accounting, Economics, and Law: A Convivium

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Extraterritorial Discovery in Aid of Execution and State Immunity: Case Comment on Republic of Argentina v. NML Capital, Ltd., 573 U.S. ___ (2014)

Tomoko Ishikawa
Published Online: 2014-11-08 | DOI: https://doi.org/10.1515/ael-2014-0016

Abstract

On 16 June 2014, the Supreme Court of the United States rejected the petition for a writ of certiorari stemming from the dispute over the meaning of the pari passu clause in the Argentine sovereign bonds. This decision had a dramatic impact on Argentina’s sovereign debt restructurings (SDR) – indeed, it arguably led to Argentina’s second default in 13 years on 30 July 2014. On the same day that the petition for certiorari was rejected, the Supreme Court rendered a judgment on the issue of the relationship between discovery in aid of execution against the debtor state’s extraterritorial assets and the law of state immunity. In Republic of Argentina v. NML Capital, Ltd., judgment of 16 June 2014, the Supreme Court affirmed the Second Circuit’s conclusion that the extraterritorial assets discovery against two non-party banks in aid of executing the judgments stemming from Argentina’s default of its external debt did not offend Argentina’s sovereign immunity. This comment addresses this judgment on extraterritorial discovery which, although less headline grabbing than the decisions on the pari passu clause, also marks a victory for holdout creditors. It first provides a summary of the background of the case and the judgment, and then considers its implications on the future SDR. Regarding the implications of the case on the future SDR, this comment also describes the developments of law concerning the relationship between the law on foreign investment and SDR (in investment arbitration) and the relationship between investment arbitration awards and sovereign immunity (in US courts). First, it examines the recent decisions in ICSID arbitration concerning the disputes arising from the Argentina’s default and subsequent SDR (Abaclat v. Argentina (decision on jurisdiction and admissibility of 4 August 2011) and Ambiente v. Argentina (decision on jurisdiction and admissibility of 8 February 2013)). In essence, these decisions opened the door to investment treaty arbitration for holdout creditors of international sovereign bonds, for the first time in the history of investment arbitration. It then describes the Second Circuit’s recent decision in Blue Ridge v. Argentina (judgment of 19 August 2013) in which the court concluded that the defendant state in an ICSID arbitration was considered to have waived its jurisdictional immunity under the Foreign State Immunity Act of 1976 (FSIA). It argues that the combination of: (a) Argentina v. NML, (b) Blue Ridge v. Argentina, and (c) the openness of ICSID arbitration to disputes arising from SDR will have potentially serious consequences for future SDR.

Keywords: state immunity; sovereign debt restructurings; discovery in aid of execution

Table of contents

Introduction

On 30 July 2014, the deadline for the grace period for Argentina for a missed scheduled payment to its creditors expired. Ratings agencies declared Argentina in default.1 This is the country’s second (arguable) default in 13 years after Argentina defaulted on over US $100 billion of international bond repayments in December 2001. The default was followed by two exchange offers in 2005 and in 2010. The vast majority of creditors tendered into these exchange offers, as a result of which the portion of “holdout” debt fell to 7% in 2011. Despite this high rate of acceptance, the remaining holdout creditors eventually blocked the restructuring of Argentina’s debt. In particular, since 2003, a US hedge fund NML (a subsidiary of Elliott Asset Management) filed 11 actions in the United States District Court for the Southern District of New York (SDNY) to collect on its defaulted Argentinian bonds issued pursuant to a 1994 Fiscal Agency Agreement, which was governed by New York law. NML prevailed in each of these cases, and a series of decisions by US courts on the dispute between NML and Argentina over the meaning of the pari passu clause in the Argentina’s sovereign bonds is reported to have led to the (arguable) second default. On 23 August 2013, the United States Court of Appeals for the Second Circuit (Second Circuit) affirmed the injunctive remedial orders of the SDNY (by Judge Griesa)2 which requested Argentina to “whenever Argentina pays a percentage of what is due on the Exchange Bonds, it must pay plaintiffs the same percentage of what is then due on the FAA Bonds” and also prevented third parties (the indenture trustee(s), the registered owners, and the clearing systems) from assisting Argentina to evade the injunctions.3 This is based on the interpretation of the pari passu clause in the relevant holdout bonds that Argentina was in breach of the clause by ranking its payment obligations to NML below its obligations to those who accepted the restructuring. On 16 June 2014, the Supreme Court of the United States rejected the petition for a writ of certiorari to review the decision by the Second Circuit.4 The approach adopted by US courts in this case is controversial,5 especially given the fact that NML is often called a “vulture fund” whose strategy is to purchase highly discounted sovereign bonds and sue for full recovery as holdouts.6 The decision of the Supreme Court also sparked discussions of its implications for Argentina’s SDR, in particular the concern over its second default.7 Judge Griesa then ordered Argentina, NML and another hedge fund, Aurelius Capital Management, to negotiate a settlement of the dispute under the court-appointed mediator. Yet the parties failed to reach a settlement before 30 July 2014, which led to Argentina’s (arguable) second default.8 This series of events resulted in Argentina filing an application instituting proceedings against the United States before the International Court of Justice (ICJ) regarding a “[d]ispute concerning judicial decisions of the United States of America relating to the restructuring of the Argentine sovereign debt”.9 While the only basis for jurisdiction is the acceptance of the ICJ’s jurisdiction by the US (Article 38(5) of the Rules of Court),10 it is reported (as of 7 August 2014) that the United States will refuse to give such consent to jurisdiction.11 Most recently, at its 107th plenary meeting during the 68th session, on 9 September 2014, the United Nations General Assembly adopted the resolution 68/304 “Towards the establishment of a multilateral legal framework for sovereign debt restructuring processes”, with 124 in favour and 11 against (41 abstained).12 The resolution includes the General Assembly’s decision “to elaborate and adopt through a process of intergovernmental negotiations, as a matter of priority during its sixty-ninth session, a multilateral legal framework for sovereign debt restructuring processes”.

****

On the same day that the petition for certiorari was rejected, the Supreme Court issued a judgment which, although less headline grabbing, also marks a victory for holdout creditors. In Republic of Argentina v. NML Capital, Ltd., judgment of 16 June 2014,13 the Supreme Court affirmed the Second Circuit’s conclusion that the extraterritorial asset discovery against two non-party banks to aid in enforcing judgments stemming from Argentina’s default of its external debt did not offend its sovereign immunity. This comment addresses the implications of this judgment. It first briefly explains the background of the case, provides a summary of the judgment, and then considers its implications on future SDR. On the implications of the case on future SDR, this comment also describes the recent developments of law concerning the law on foreign investment and SDR (in investment arbitration) and investment awards and jurisdictional immunity under the FSIA (in US courts). First, it examines the recent decisions in investment arbitration under the ICSID Convention14 (ICSID arbitration) concerning the disputes arising from the Argentina’s default and subsequent SDR. In essence, these decisions opened the door to investment treaty arbitration for holdout creditors of international sovereign bonds, for the first time in the history of investment arbitration. It then describes the Second Circuit’s recent decision in Blue Ridge v. Argentina15 in which the court concluded that the defendant state in an ICSID arbitration was considered to have waived its jurisdictional immunity under the FSIA. Having described these recent developments of law in both ICSID arbitration (the openness of ICSID arbitration to dispute arising from SDR) and US Courts (on the scope of jurisdictional immunity in respect of discovery and the relationship between ICSID arbitration and jurisdictional immunity), this comment argues that the combination of these developments will have potentially serious consequences for future SDR.

Background and summary of the Supreme Court judgment

Following the default of Argentina’s external debt in 2001, NML, the leading holdout creditor in the sovereign debt dispute against Argentina, filed 11 actions against the country in the SDNY for the recovery of the debt and prevailed in each of these actions.16 As Argentina did not satisfy these judgments for them, NML attempted to execute the judgments against Argentina’s property. In such an attempt, NML served subpoenas on Bank of America (BOA) and Banco de la Nación Argentina (BNA) on 10 March 2010, and 14 June 2010 (respectively) for the purpose of discovery of documents relating to, inter alia, accounts maintained at these banks by or on behalf of Argentina without territorial limitation.17 At a hearing on 30 August 2011 and in a subsequent order on 2 September 2011 (the Discovery Order),18 the district court approved the subpoenas “subject to the need for counsel to negotiate a more specifically drawn subpoena in each case and subject to a possible application to the Court on the specifics of the subpoenas”.19 Argentina appealed arguing that extraterritorial asset discovery infringed on Argentina’s sovereign immunity and thereby the Discovery Order violated Sections 1602 et seq. of the FSIA. The Second Circuit, in its decision of 20 August 2012, affirmed the Discovery Order by holding, inter alia, that the banks’ compliance with the subpoenas would not infringe on Argentina’s sovereign immunity.20 The Second Circuit first made it clear that the Discovery Order did not involve the attachment of Argentina’s property, and therefore it did not implicate Argentina’s immunity from attachment under the FSIA. It also recognised that the Discovery Order was distinguished from jurisdictional discovery, as in this case the jurisdiction of the district court was clearly established. Finally, the Court stressed that the Discovery Order was directed at third-party banks that have no claim to sovereign immunity, not at Argentina itself, and the banks’ compliance with the subpoenas would cause Argentina no burden and no expense.21

In January 2013, Argentina filed a writ of certiorari to review this judgment, and the Supreme Court granted the petition for the writ.22 The government of the United States submitted an Amicus Curiae brief, in which it sided with Argentina arguing, inter alia, that discovery orders as sweeping as the Discovery Order would be “a substantial invasion of [foreign states’] sovereignty”.23

As noted, the Supreme Court affirmed the Second Circuit’s decision that the Discovery Order did not infringe on Argentina’s sovereign immunity. It first confirmed that under the FSIA, there is no provision forbidding or limiting discovery in aid of execution against a foreign sovereign judgment debtor’s assets.24 In response to Argentina’s arguments that immunity from execution necessarily entails immunity from discovery in aid of execution and therefore “discovery of assets that do not fall within an exception to execution immunity … is forbidden”,25 the Court stated that, even if these arguments were correct, they would not apply to “NML’s general request for information about Argentina’s worldwide assets”, as section 1609 “immunizes only foreign-state property ‘in the United States’”.26 Likewise, the Court disagreed with the arguments of the United States in its Amicus Curiae brief, by stating that “these apprehensions are better directed to that branch of government with authority to amend the Act – which, as it happens, is the same branch that forced our retirement from the immunity-by-factor-balancing business nearly 40 years ago”.27

Implications of Argentina v. NML

For any holdout creditor in sovereign debt disputes, prevailing in its case against the defaulting state in litigation before US courts is still far from satisfactory. This is because under the FSIA, immunity from jurisdiction and immunity from execution are treated separately (the former is covered under Sections 1604 to 1608 and the latter under Sections 1609 to 1611), and the waiver of jurisdictional immunity does not extend to immunity from execution.28 This is in line with the generally accepted position under customary international law29 and state practice.30 Prior to the enactment of the FSIA, while the doctrine of restrictive state immunity from jurisdiction had already been adopted,31 “[t]he immunity of a foreign state from execution has [had] remained absolute”.32 The FSIA introduced exceptions to the immunity from execution only with great caution. Indeed, under the Act, the scope of immunity is broader in respect of execution than jurisdictional immunity.33 In particular, the requirement for the exception to immunity from execution that “the property is or was used for the commercial activity upon which the claim is based” (Section 1610(a)(2)) dramatically limits the scope of such an exception to the extent of rendering it a “null set”.34 This “nexus requirement”35 presents an obstacle to the execution of judgments36 against the defendant state’s asset located in the United States, especially because the state “can simply move all assets out of the country where litigation is anticipated”.37

Given the current situation under the FSIA described above, the Supreme Court’s conclusion that the waiver of jurisdictional immunity extended to the power of a court to order extraterritorial discovery in aid of execution will certainly help the NML to enforce the judgments on Argentina’s default. The rest of this comment assesses the implication of this decision to grant the discovery in aid of execution of the debtor state’s extraterritorial asset, which is, in tandem with the injunctive orders, counted as a major victory for holdout creditors. Although, therefore, it is not the purpose of this comment to assess the appropriateness, as a matter of US law, of the interpretation of the FSIA on the scope of post-judgment discovery adopted by US courts, it should be noted that an in-depth and critical analysis of the Supreme Court’s approach is provided elsewhere by Professor Cross.38 In particular, she observes that the legislative history of the FSIA (see above) supports the presumption against extraterritoriality and identifies two concerns behind the presumption, that is, comity concerns of interfering with a foreign state’s authority, and separation of powers concerns relating to the courts interfering in delicate matters of foreign policy. She then argues that the Supreme Court’s interpretation of the FSIA’s silence with respect to discovery to mean that it does not limit a court’s discretion to order discovery of a foreign state’s assets, and this is to turn the presumption on its head. She argues that such a result “contravenes the spirit, if not the letter, of the presumption against extraterritoriality”. She also agrees with the US government’s policy concerns raised in its amicus curiae brief that upholding the expansive discovery and injunction orders in this case will “threaten harm to the United States” foreign relations on a variety of fronts.39

The assessment of the impact of this decision on future SDR starts with the recognition that the success of holdout creditors implies a lower chance of success for SDR. Creditors will not be willing to accept the restructuring offer knowing that holdout creditors have a good chance to obtain full and practically enforceable compensation, whereas their new credits under the exchange offer they took will not eventually be paid (the latter is the consequence of NML v. Argentina (Second Circuit, August 2013)). Therefore, successful holdout litigation will “encourage parties to hold out and make restructurings harder to achieve”.40 Given the increase in the frequency of sovereign debt litigation,41 this approach adopted by the US courts in the NML-Argentina disputes casts concerns over the future of SDR.

These considerations underscore the importance of including collective action clauses (CACs) in the contractual terms of bonds, which will “effectively eliminate the possibility of ‘holdout’ litigation”42 for the reasons explained below. The mechanism for CACs in New York law43 generally includes the following three major provisions: the majority action clause, a collective representation clause, and the initiation clause.44 Under the majority action clause, the modification of the “reserved matters” including basic payment terms (such as payment dates, payment amounts, interest rates, and payment currency) approved by the qualified majority45 is legally binding on all creditors. Accordingly, holdout creditors may not raise contractual causes of action for full payment, and in this case, the default event is “remedied”.46 The initiation clause provides a “cooling off” period – the period for electing a representative and deciding how to negotiate – during which creditors may neither initiate any litigation against the sovereign nor declare the full amount of the bond due and payable (acceleration).47 CACs thus dramatically reduce the risk of holdout litigation as the major obstacle to the SDR process. Indeed, in the absence of sovereign bankruptcy mechanisms, CACs have received nearly universal support by the major economies:48 in addition to sovereign bonds issued under English law,49 New York law and Japanese law,50 in 2010 the Eurogroup decided to include CACs for all euro-zone sovereign debt securities.51

However, recently, two ICSID arbitral tribunals issued the decisions on jurisdiction and admissibility, which, as I discussed elsewhere,52 potentially neutralise the function of CACs, even though the bonds at issue in these decisions did not include CACs.53 Investment treaties often provide the ICSID as an impartial forum for the settlement of disputes between foreign investors and the host state, so that the foreign investor may bring its claim against the host state before the ICSID arbitration alleging a breach of, inter alia, the relevant investment treaty obligations.54 Relying on this dispute settlement mechanism under the Argentina-Italy bilateral investment treaty (BIT), a number of Italian holders of the defaulted Argentine bonds who bought these bonds through secondary market transactions filed claims, through their representatives,55 against Argentina. They claimed, inter alia, that certain acts of Argentina in the SDR process constituted a breach of the BIT obligations such as the obligation to provide fair and equitable treatment and prohibition of expropriation without compensation. There were a number of jurisdictional issues involved in this case, yet both tribunals concluded that the general prerequisites for the jurisdiction of ICSID tribunals were met, and the claims were admissible.56 The facts of the cases and the tribunals’ findings are not repeated here, but the finding which is most important and pertinent for the purposes of this comment is as follows. Both tribunals considered that certain acts of Argentina following its default were acts of a sovereign independent of Argentina’s conduct as a party to the bond contracts, and thereby may constitute potential breaches of its BIT obligations. According to this finding, irrespective of the contractual position of the debtor state under the relevant bond, the state may still be found responsible for a breach of treaty obligations. Therefore, even when the relevant bonds include CACs and they are successfully implemented, holdout creditors may still be able to have recourse to investment treaty arbitration by claiming that the debtor state’s exercise of its sovereign power in the SDR process constitutes a breach of treaty obligations. Even leaving aside the theoretical issues included in this approach,57 the negative impact of neutralising CACs is clear. Investment arbitration by holdout creditors that is not hindered by the successful implementation of CACs allows the “creditor coordination problem”, which is the major cause of the failure of SDR, to continue to exist. Moreover, the US courts’ approach on extraterritorial discovery (which culminated in Argentina v. NML (Supreme Court, June 2014)) actually increases the risk of the failure of SDR, because it makes ICSID arbitration an even more attractive option for holdouts. The remaining of this short article addresses this point.

The “Achilles’ heel” of the ICSID awards may be strengthened by extraterritorial discovery

While the ICSID Convention provides a strong enforcement mechanism for ICSID arbitration awards by requiring each contracting state to enforce the pecuniary obligations imposed by such awards “within its territories as if it were a final judgment of a court in that State”,58 state immunity from execution is preserved even under the ICSID Convention. Article 54(3) of the ICSID Convention provides that the execution of the ICSID award against the assets of the debtor state is subject to the local laws of the enforcing state: “[e]xecution of the award shall be governed by the laws concerning the execution of judgments in force in the State in whose territories such execution is sought”. Article 55 further provides that “[n]othing 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”. Certainly, in practice, the rate of compliance with ICSID awards is very high.59 An explanation for this high compliance rate is the fear of the debtor states that they may not be able to obtain further loans from the World Bank.60 However, when the debtor state nevertheless refuses to comply with the award, it is possible that the enforcing courts refuse the execution against the debtor state’s assets. For example, in AIG Capital Partners Inc. v Kazakhstan, the claimant sought to execute an ICSID award61 against the assets of the National Bank of Kazakhstan (NBK) held by a private bank (AAMGS) in the High Court of Justice in England. Justice Aiken refused to issue a Third Party Debt Order against these assets on two grounds. First, while a TPD Order cannot be made unless there is a “debt due or accruing due” from a third party to the judgment debtor, the account holder is the NBK as a separate entity from the Republic of Kazakhstan (RoK), the judgment debtor. There is no debtor and creditor relationship between the RoK and AAMGS, and therefore there is no basis on which to make a TPD Order against AAMGS.62 Second, according to Section 14(4) of the State Immunity Act of 1978,63 the property of a State’s central bank must enjoy complete immunity from the enforcement process in the UK courts. The NBK has “property” of some form in the London Assets; viz. a contractual right to the payment of debts in the case of the cash accounts held by AAMGS, and therefore the London Assets are immune from the enforcement process in the UK courts. Justice Aiken also explicitly noted: “the (ICSID) Award was always subject to the restrictions on enforcement that existed at the time it was made. Those restrictions are clear from Article 55 of the Washington Convention”.64 In Liberian Eastern Timber Corporation v. Liberia, Liberia filed a petition to vacate an ex parte judgment enforcing the relevant ICSID award65 before the SDNY. The issues were twofold: “whether the District Court had subject matter jurisdiction, under sections 1604 and 1605 of the FSIA, to enter judgment based upon the arbitration award, and if so, whether it also had the power to issue executions, under sections 1609 and 1610 of the FSIA, upon property of Liberia to enforce the judgment”.66 The court answered the first question in the affirmative by stating that: “Liberia, as a signatory to the Convention, waived its sovereign immunity in the United States with respect to the enforcement of any arbitration award entered pursuant to the Convention”.67 On the second question, the Liberian assets at issue were tonnage fees, registration fees, and other taxes due from ships flying the Liberian flag, and the question was whether these assets were “used for a commercial activity in the United States” within the meaning of section 1610(a) of the FSIA. The court concluded that “[t]he levy and collection of taxes intended to serve as revenues for the support and maintenance of governmental functions are an exercise of powers particular to a sovereign” and fell outside the scope of section 1610(a) of the FSIA.68 The court therefore granted Liberia’s motion to vacate the executions upon such funds. LETCO, a French entity, subsequently obtained orders attaching the bank accounts (at two banks) of the Liberian Embassy, but this attempt to execute the award against the bank accounts also failed, as the United States District Court for the District of Columbia concluded that the bank accounts of the Liberian Embassy were immune from attachment. It did so on the grounds that not affording diplomatic immunity to a foreign embassy’s bank accounts was inconsistent with the Vienna Convention on Diplomatic Relations69 and that “[t]he essential character of the activity for which the funds in the accounts are used…undoubtedly is of a public or governmental nature because only a governmental entity may use funds to perform the functions unique to an embassy” and therefore the bank accounts fell outside the scope of section 1610(a) of the FSIA.70

Therefore, Schreuer, in his commentary to the ICSID Convention, observe that “Art. 55 may be seen as the Achilles’ heel of the Convention. The otherwise effective machinery of arbitration has its weak point when it comes to the actual execution against States of pecuniary obligations under awards”.71

This being so, finding assets which are covered by exceptions to immunity from execution under the law of the enforcing state is essential for the successful enforcement of an ICSID award. In this respect, extraterritorial discovery against the debtor states’ assets without the need to specify them, which is now permitted under the FSIA as the extension of jurisdictional immunity by Argentina v. NML (Supreme Court, June 2014), will alleviate the daunting challenge of finding such assets, if such discovery is available for the purposes of ICSID arbitration awards. Therefore, the remaining issue is whether or not such discovery is open to ICSID arbitration awards under the FSIA. This hinges on the question of whether or not the defendant state in an ICSID arbitration is considered to have waived its immunity from the suit under the FSIA. The Second Circuit recently answered this question in the affirmative in Blue Ridge Investments, L.L.C. v. Republic of Argentina,72 as described in the next paragraph.

Extraterritorial discovery will be available to ICSID awards – Blue Ridge v. Argentina

This case arose from an ICSID award called CMS v. Argentina in which Argentina was ordered to pay compensation in the amount of $133.2 million plus interest (the Award).73 Blue Ridge purchased the CMS’s interest in the Award and notified Argentina of the purchase in June 2008. Blue Ridge notified Argentina that it had purchased the CMS’s interest in the Award. On 8 January 2010, Blue Ridge filed the petition to confirm the Award pursuant to Article 54 of the ICSID Convention. The issue before the SDNY was whether or not Argentina waived its immunity from the suit under the FSIA. Section 1605 of the FSIA provides for six exceptions to a foreign state’s jurisdictional immunity. Two of these exceptions at issue in this case were the so-called implied waiver exception (section 1605(a)(1)) and the so-called arbitral award exception (section 1605(a)(6)).74 On the first exception, the district court concluded, citing its own statement in LETCO v. Liberia (cited above), that as a Contracting State to the ICSID Convention, Argentina had waived its sovereign immunity with respect to the recognition and enforcement of arbitral awards issued under that Convention, pursuant to § 1605(a)(1).75 On the second, “arbitration” exception, the district court held that since Argentina and the US are both signatories to the ICSID Convention, “Argentina’s agreement to submit its dispute with the CMS to arbitration governed by the ICSID Convention constituted a waiver of immunity under Section 1605(a)(6)(B) with respect to recognition and enforcement of the Award”.76 On appeal, the Second Circuit affirmed the district court’s judgment on both issues. In particular, with respect to the arbitration exception under Section 1605(a)(6), the Court observed that: “[t]o our knowledge, every court to consider whether awards issued pursuant to the ICSID Convention fall within the arbitral award exception to the FSIA has concluded that they do” and agreed with this conclusion.77 Therefore, it can be safely concluded that extraterritorial discovery in aid of execution is available for the purposes of enforcing ICSID arbitral awards.

Conclusion

This comment has examined the current situation in the United States on the relationship between the debtor states’ sovereign immunity on the one hand, and (a) extraterritorial discovery and (b) ICSID awards on the other. A possible consequence of the current situation is as follows. If ICSID arbitration is available to the holdout creditors in relation to the debtor state,78 these creditors of sovereign bonds with CACs may, even after the successful implementation of the CACs, still resort to ICSID arbitration. This is possible because, even though their claims are barred as a matter of the contract, they still may assert that the debtor states’ measures concerning its SDR are acts of a sovereign and constitute a breach of the relevant investment treaty. If the holdout creditors are awarded compensation in ICSID arbitration and if the debtor state does not comply with the award, the creditors seeking to enforce the award will immediately face the obstacle of immunity from execution (Article 55 of the ICSID Convention). However, a wide scope of extraterritorial discovery, which is permitted as the extension of the waiver of jurisdictional immunity (Argentina v. NML (Supreme Court, June 2014)), is available in aid of the execution of ICSID awards, because such awards would fall within the arbitration exception to jurisdictional immunity (Blue Ridge v. Argentina). Consequently, ICSID arbitration will not only avoid the contractual limitations under CACs but also be given a potent aid – extraterritorial discovery – in aid of executing its award. This means that these recent developments of law in both ICSID arbitration and US Courts will make ICSID arbitration an even more attractive option for holdout creditors. It is too early to predict the long-term impact of these developments,79 but what is clear is that they have the potential to thwart the rationale for including CACs in bond terms, and place another hurdle before SDR. This finding supports the need for constructive dialogue on possible means to improve the current SDR regime including the establishment of a multilateral legal framework as proposed by the UN General Assembly’s resolution 68/304.

References

Footnotes

  • 1

    Russo and Porzecanski (2014); Buenos Aires Herald (2014). On the same day, however, Argentina denied being in default. See http://www.euronews.com/2014/08/01/argentina-denies-being-in-default. 

  • 2

    NML Capital, Ltd. v. Republic of Argentina, No. 08 Civ. 6978(TPG), 2012 WL 5895784 (S.D.N.Y. 21 November 2012); Aurelius Capital Master, Ltd. & ACP Master, Ltd. v. Republic of Argentina, No. 09 Civ. 8757(TPG), Dkt. No. 312 (S.D.N.Y. 26 November 2012); Olifant Fund, Ltd. v. Republic of Argentina, No. 10 Civ. 9587, Dkt. No. 40 (S.D.N.Y. 26 November 2012); Varela v. Republic of Argentina, No. 10 Civ. 5338, Dkt. No. 64 (S.D.N.Y. Nov. 26, 2012). These were amended orders following the request by the Second Circuit in its decision of 26 October 2012 to clarify the scope of injunction. NML Capital Ltd v. The Republic of Argentina, 699 F.3d 246 (2012) (NML v. Argentina (Second Circuit, October 2012)). 

  • 3

    NML Capital Ltd v. The Republic of Argentina, 727 F.3d 230 (2013) (23 August 2013) (NML v. Argentina (Second Circuit, August 2013)). 

  • 4

    For a chronological list of proceedings and orders on this case, see SCOTUSBLOG, “Republic of Argentina v. NML Capital: Petition for certiorari denied on 16 June 2014” at: http://www.scotusblog.com/case-files/cases/republic-of-argentina-v-nml-capital-ltd. 

  • 5

    See e.g. Smith (2014). 

  • 6

    Lord Phillips, the president of the Supreme Court of the United Kingdom, described NML as a vulture fund that “feed(s) on the debts of sovereign states that are in acute financial difficulty by purchasing sovereign debt at a discount to face value and then seeking to enforce it” (NML Capital Limited v. Republic of Argentina, [2011] UKSC 31). It is observed that such “‘holdout’ strategy can be highly profitable for investors with patience” (Hornbeck, 2013, p. 8)). 

  • 7

    For example, Council on Hemispheric Affairs (2014). 

  • 8

    On 1 August 2014, Judge Griesa ordered the litigant to hold new negotiations. 

  • 9

    ICJ, Press Release (Unofficial) “The Argentine Republic seeks to institute proceedings against the United States of America before the International Court of Justice. It requests US to accept the Court’s jurisdiction” (7 August 2014) at: http://www.icj-cij.org/presscom/files/4/18354.pdf. 

  • 10

    Ibid. See also, Cambridge Journal of International and Comparative Law, “Sitting, Waiting, Wishing: Argentina Initiates Sovereign Default Claim before the ICJ” (Posted on 10 August 2014) at: <http://cjicl.org.uk/2014/08/10/sitting-waiting-wishing-argentina-initiates-sovereign-default-claim-international-court-justice-requesting-usa-consent-jurisdiction/>. 

  • 11

    Reuters, “US refuses to recognize UN court jurisdiction on Argentina’s debt” (9 August 2014) at: <http://rt.com/news/179228-argentina-us-un-debt/>. 

  • 12

    UNGA Res 68/304 (9 September 2014) UN Doc A/RES/68/304. The resolution includes the recognition of “the sovereign right of any State to restructure its sovereign debt, which should not be frustrated or impeded by any measure emanating from another State” and the recognition that “the efforts of a State to restructure its sovereign debt should not be frustrated or impeded by commercial creditors, including specialized investor funds such as hedge funds, which seek to undertake speculative purchases of its distressed debt at deeply discounted rates on secondary markets in order to pursue full payment via litigation”. The “no” votes include the United States, the United Kingdom, Japan, and Germany. See also UN Department of Public Information, GA/11560, “‘The Fasten Seat Belt Light is Illuminated’ Warns Secretary General, Summoning World Leaders at Start of Annual Debate to ‘Find and Nurture Seeds of Hope’” http://www.un.org/News/Press/docs//2014/ga11560.doc.htm; MercoPress, “UN assembly sides with Argentina votes to change sovereign debt restructuring” (10 September 2014) http://en.mercopress.com/2014/09/10/un-assembly-sides-with-argentina-votes-to-change-sovereign-debt-restructuring. 

  • 13

    Republic of Argentina v. NML Capital, Ltd., 573 U.S. ___ (2014) (Argentina v. NML (Supreme Court, June 2014)). 

  • 14

    The Convention on the Settlement of Investment Disputes between States and Nationals of Other States (18 March 1965) 575 UNTS 159. 

  • 15

    Blue Ridge Investments, L.L.C. v. Republic of Argentina, Docket No. 12–4139–cv., 19 August 2013 (Second Circuit) (Blue Ridge v. Argentina (Second Circuit)). 

  • 16

    Ibid. (I. Background). 

  • 17

    The documents include, for example, those relating to electronic fund transfers sent through the SWIFT (Society for Worldwide Interbank Financial Telecommunication) system, an electronic messaging system that provides instructions to banks, brokerages, and other financial institutions for money transfers. EM Ltd. v. Republic of Argentina, 695 F.3d 201 (2d Cir. 2012), pp. 204–5. 

  • 18

    Opinion, United States District Court, Southern District of New York (2 September 2011) (attached to the Petition for Writ of Certiorari by Argentina to the United States Court of Appeals for the Second Circuit of 2 January 2013). 

  • 19

    Hearing Transcript Excerpts, United States District Court, Southern District of New York (30 August 2011), p. 69 (attached to the Petition by Argentina (ibid.)). For example, NML agreed to modify its subpoenas, including by allowing BOA to exclude lower level Argentinian officials from searches of SWIFT messages (ibid. App. 7). 

  • 20

    EM Ltd. v. Republic of Argentina (Second Circuit), supra note 17. 

  • 21

    Ibid., pp. 208–210. The Court of Appeal disagreed with Rubin v. Islamic Republic of Iran (637 F.3d 783 (7th Cir. 2011)) in which the Seventh Circuit concluded that the FSIA required a judgment creditor to identify specific non-immune assets before being entitled to further discovery about those assets. 

  • 22

    Argentina v. NML Capital, Ltd., No. 12–842, 2014 BL 7274 (10 January 2014). 

  • 23

    Argentina v. NML, on Writ of Certiorari to the United States Court of Appeals for the Second Circuit, Brief for the United States as Amicus Curiae in support of Petitioner, at: <http://www.justice.gov/osg/briefs/2013/3mer/1ami/2012-0842.mer.ami.pdf>, p. 18. 

  • 24

    Argentina v. NML (Supreme Court, June 2014) p. 8. In the absence of the reference to discovery in the FSIA, post-judgment discovery is governed by Federal Rules of Civil Procedure 69 (Execution): “(a) In general… (2) Obtaining Discovery. In aid of the judgment or execution, the judgment creditor or a successor in interest whose interest appears of record may obtain discovery from any person – including the judgment debtor – as provided in these rules or by the procedure of the state where the court is located.” 

  • 25

    p. 9. 

  • 26

    Ibid. For the examples of documents sought by the subpoenas, see EM Ltd. v. Republic of Argentina (Second Circuit), supra note 17, pp. 204–5. 

  • 27

    Ibid., p. 11. 

  • 28

    Ostrandar (2004). It should be noted that while waivers of jurisdictional immunity “have become universal since the enactment of the FSIA”, waivers of immunity from execution have remained rare (Neve, 2013–2014, p. 651). See also, Weidemaier (2014, p. 86). 

  • 29

    See Jurisdictional Immunities of the State (Germany v. Italy: Greece intervening), Judgment of 3 February 2012, at: <http://www.icj-cij.org/docket/files/143/16883.pdf> para. 113: “The rules of customary international law governing immunity from enforcement and those governing jurisdictional immunity (understood stricto sensu as the right of a State not to be the subject of judicial proceedings in the courts of another State) are distinct, and must be applied separately”. The ICJ also stated that “the immunity from enforcement enjoyed by States in regard to their property situated on foreign territory goes further than the jurisdictional immunity enjoyed by those same States before foreign courts” (ibid.). 

  • 30

    See Fox (2010). The rationale for immunity from execution as distinct from jurisdictional immunity is explained as follows: “[e]nforcement against State property constitutes a greater interference with a State’s freedom to manage its own affairs and to pursue its public purposes than does the pronouncement of a judgment or order by a national court of another State” (ibid., p. 607); and “while the announcement of a judgment against a foreign sovereign implicates a fair measure of that state’s dignity, the arrest of and execution against a foreign state’s assets have much stronger potential to upset diplomatic relations” (Ostrandar, 2004). See also, Yang (2012). 

  • 31

    In 1952, the US State Department announced the policy shift concerning sovereign immunity, the so-called Tate Letter, in which it stated that “the Department would follow the ‘restrictive’ theory of sovereign immunity in the consideration of a foreign government’s request for a suggestion of immunity by the Department to the court; in particular, it would decline to suggest immunity in controversies arising out of foreign governments’ ‘engaging in commercial activities’” (Dobrovir, 1968, p. 2). Also, in Alfred Dunhill of London, Inc. v. Cuba, 425 U.S. 682 (1976), the Supreme Court stated that “it is fair to say that the “restrictive theory” of sovereign immunity appears to be generally accepted as the prevailing law in this country”. For a summary of the history of transition from absolute jurisdictional immunity to restrictive immunity in the United States, see Gamal Moursi Badr (1984); George Kahale, III (1982). 

  • 32

    United States (1973, p. 121). 

  • 33

    Mola (2012, p. 540). 

  • 34

    Weidemaier, supra note 28, p. 87. This is particularly because “sovereigns quickly spend the money they borrow, few assets will meet this [nexus requirement]” (pp. 80–81). See also Delaume (1994, p. 266): “(for judicial remedies) the restrictive character of section 1610(a)(2) may entail serious adverse consequences”. 

  • 35

    Such a requirement is not present in many other jurisdictions. Ostlander, supra note 30, p. 557; Crawford (1981, p. 833). 

  • 36

    It should be noted that a 1988 amendment added subparagraph (6) to section 1610(a) which, with regard to measures of execution following confirmation of an arbitral award, exposes all the commercial properties of the award debtor to execution. As a result, the “nexus requirement” no longer applies to an arbitral award. It is observed that “this difference of treatment between arbitral and judicial situations may be an incentive for lenders to have recourse to arbitration to a greater extent than usual” (Delaume, 1994, p. 266). 

  • 37

    Neve, supra note 28, p. 651 (citation omitted). See also Swanson (1999, p. 446): “[i]n many cases… the defendant uniquely controls the facts establishing the exception, seriously disadvantaging the plaintiff unless effective discovery is available”. 

  • 38

    Cross (2014). 

  • 39

    Brief for the United States as Amicus Curiae in support of Petitioner, supra note 23, p. 18. See also Cross, id., p. 40. Contra: Haller (2014). 

  • 40

    James (2012). 

  • 41

    Schumacher, Trebesch, and Enderlein observe that in recent years “almost 50% of debt crises involved litigation, compared to less than 10% in the 1980s and early 1990s” (Schumacher, Trebesch, & Enderlein, 2014). 

  • 42

    NML v. Argentina (Second Circuit, October 2012) at 27. See also Mola, supra note 33 at 533: “When the CACs of this type are triggered, the enforcement of the full value of the bond by judicial means can no longer be pursued”; Crook (2013, pp. 223–224). 

  • 43

    Under New York law, following the proposal by the Under Secretary of the Treasury John Taylor, CACs have been included in most of New York bonds since 2003. In NML v. Argentina (Second Circuit, 26 October 2012) (supra note 2), the Second Circuit noted that 206 out of 211 New York law governed sovereign bond issues made between 2005 and 2010 included CACs (at 27). See, Das, Papaioannou, and Trebesch (2012); Quarles (2010, pp. 32–32); Gallagher (2011). 

  • 44

    Taylor (2002). 

  • 45

    Galvis and Saad (2003–2004). 

  • 46

    Gugiatti and Richards (2003–2004). 

  • 47

    Barraud (2009) (citing IMF, 2002). 

  • 48

    According to the International Monetary Fund (IMF), “[i]n 2005, more than 95% of new issues, in value, included CACs” (IMF Global Financial Stability Report, April 2006). 

  • 49

    Yianni (1999, pp. 80–81). 

  • 50

    Liu (2002, p. 6). 

  • 51

    This obligation is provided in paragraph 3 of Article 12 of the Treaty Establishing the European Stability Mechanism (Article 12(3): “3. Collective action clauses shall be included, as of 1 January 2013, in all new euro area government securities, with maturity above one year, in a way which ensures that their legal impact is identical”). The treaty entered into force on 27 September 2012 (for Estonia on 3 October 2012). 

  • 52

    Ishikawa (2014). 

  • 53

    Abaclat and others v. Argentina, ICSID Case No. ARB/07/5, Decision on Jurisdiction and Admissibility of 4 August 2011; Ambiente Ufficio and others v. Argentina, ICSID Case No. ARB/08/9, Decision on Jurisdiction and Admissibility of 8 February 2013. 

  • 54

    ICSID arbitration is available when both the host state and the home state of the disputing investor are parties to the ICSID Convention. As of 11 April 2014, the ICSID Convention has 150 member states. 

  • 55

    l’Associazione per la Tutela degli Investitori in Titoli Argentini (TFA) for the Abaclat case, and North Atlantic Société d’Administration (NASAM) for the Ambiente case. TFA consists of Italian major banks and NASAM is a company established in Monaco and then acquired by a Swiss-based trust company. 

  • 56

    Both decisions are accompanied by strong dissenting opinions by Professor Abi-Saab (Abaclat) and Judge Bernárdez (Ambiente), which indicates the controversial nature of these decisions. 

  • 57

    See Ishikawa, supra note 52, pp. 80–95. 

  • 58

    Article 54(1) of the ICSID Convention. 

  • 59

    Reed, Paulsson, and Blackaby (2011), Parra (2007). 

  • 60

    See World Bank Operational Policies 7.40. See also Fouret (2012, p. 302); Bjorklund (2009, p. 302). 

  • 61

    AIG Capital Partners, Inc. and CJSC Tema Real Estate Company Ltd. v. The Republic of Kazakhstan, ICSID Case No. ARB/01/6, Award of 7 October 2003). 

  • 62

    AIG Capital Partners Inc. v Kazakhstan [2005] EWHC 2239 (Comm); [2006] 1 W.L.R. 1420 [2006] 1 All E.R. 284, paras. 30–32. 

  • 63

    Section 14(4) provides that “Property of a State’s central bank or other monetary authority shall not be regarded for the purposes of subsection (4) of section 13 above as in use or intended for use for commercial purposes; and where any such bank or authority is a separate entity subsections (1) to (3) of that section shall apply to it as if references to a State were references to the bank or authority.” 

  • 64

    AIG Capital Partners Inc. v Kazakhstan, supra note 62, para. 95. 

  • 65

    Liberian Eastern Timber Corporation v. Republic of Liberia, ICSID Case No. ARB/83/2, Award of 31 March 1986. 

  • 66

    Liberian Eastern Timber Corporation v. Liberia, Decision of 12 December 1986 of the U.S. District Court, Southern District of New York, 650 F. Supp. 73 (1986) (LETCO v. Liberia (S.D.N.Y.)). 

  • 67

    Ibid. 

  • 68

    Ibid. 

  • 69

    500 UNTS 95 (1961). 

  • 70

    Liberian Eastern Timber Corporation v. Liberia, Decision of 16 April 1987 of the U.S. District Court, District of Columbia, 659 F.Supp. 606. 

  • 71

    Schreuer et al. (2009, p. 1154). 

  • 72

    Blue Ridge v. Argentina (Second Circuit), supra note 15. 

  • 73

    CMS Gas Transmission Company v. The Republic of Argentina, ICSID Case No. ARB/01/8, Award of 12 May 2005. On Argentina’s application for annulment of the Award, the ad hoc committee partially annulled the tribunal’s findings, yet this partial annulment did not affect the amount of compensation (Decision of the ad hoc Committee on the Application for Annulment of the Argentine Republic of 25 September 2007). It is worth noting that the committee heavily criticized the tribunal’s findings in relation to the necessity defense that “[it] contained manifest errors of law. It suffered from lacunae and elisions” (para. 158). In particular, the committee identified the errors of the tribunal that (1) it examined the defense based on customary international law before the necessity defense under the Argentina-US BIT and (2) it did not pay due regard to the substantive difference between these two laws, and observed that these two errors “could have had a decisive impact on the operative part of the Award” (paras. 89–100). Nevertheless, given a narrow mandate of the committee conferred by Article 52 of the ICSID Convention, the committee did not annul the rest of the Award (ibid., para. 158). 

  • 74

    The relevant parts of section 1605 provide that: (a) A foreign state shall not be immune from the jurisdiction of courts of the United States or of the States in any case –

    • (1)

      in which the foreign state has waived its immunity either explicitly or by implication, notwithstanding any withdrawal of the waiver which the foreign state may purport to effect except in accordance with the terms of the waiver;…

    • (6)

      in which the action is brought, either to enforce an agreement made by the foreign state with or for the benefit of a private party to submit to arbitration all or any differences which have arisen or which may arise between the parties with respect to a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration under the laws of the United States or to confirm an award made pursuant to such an agreement to arbitrate, if…

    • (B)

      the agreement or award is or may be governed by a treaty or other international agreement in force for the United States calling for the recognition and enforcement of arbitral awards.

     

  • 75

    Blue Ridge Inv., L.L.C. v. Republic of Argentina, 902 F.Supp. 2d 367 (S.D.N.Y. 2012) 374 (citing LETCO v. Liberia (S.D.N.Y), supra note 66 at 76). 

  • 76

    Ibid., at 376. 

  • 77

    Blue Ridge v. Argentina (Second Circuit), supra note 15 (citing Cont’l Cas. Co. v. Argentine Republic, 893 F. Supp. 2d 747; Funnekotter v. Republic of Zimbabwe, No. 09 Civ.8168(CM), 2011 WL 666227; and Siag v. Arab Republic of Egypt, No. M-82, 2009 WL 1834562). 

  • 78

    Threshold requirements include the existence of a written arbitration agreement between the disputing investor and the host state, and that both the host state and the home state of the investor are the parties to the ICSID Convention (Article 25 of the ICSID Convention). The ICSID Convention has 150 member states (as of 11 April 2014). 

  • 79

    Cf. Cross observes that with an increase in attachment attempts in recent sovereign debt litigation, “the NML litigation likely will considerably influence the future of sovereign debt litigation”. Cross, supra note 38, p. 10. For data demonstrating a drastic rise of sovereign debt litigation over the past decade, see Schumacher, Trebesch, and Enderlein, supra note 41. 

About the article

Published Online: 2014-11-08

Published in Print: 2015-07-01


Citation Information: Accounting, Economics and Law - A Convivium, Volume 5, Issue 2, Pages 173–192, ISSN (Online) 2152-2820, ISSN (Print) 2194-6051, DOI: https://doi.org/10.1515/ael-2014-0016.

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