Proposed Greek Collective Action Clauses Law May Trigger Its International Law Obligations
by Daniella Strik
It is said that Greece’s government has introduced legislation to its parliament this week that will allow it to enforce losses on bondholders in a write down of Greek debt. Unofficial sources have said that pursuant to the proposed legislation collective action clauses (“CACs”) will be introduced in Greek law bonds with retroactive effect. See here. As a result, pursuant to the proposed Greek law the conditions of the bonds may be amended and under the terms of the amended contracts bondholders that do not accept the proposed debt restructuring may be faced with an unilateral amendment of the conditions of the bonds, provided that a certain percentage of bondholders does accept the proposals. The new law raises questions of compatibility of this legislation with Greece’s obligations under international law, notably its bilateral investment treaties.
It is expected that the proposed legislation will affect 90% of outstanding Greek bonds, since these are governed by Greek law. These bonds currently do not contain CACs. Most of the remaining Greek sovereign debt is governed by English law, which does contain CACs. CACs are seen as a manner to restructure sovereign debt in an orderly manner.
In the past years, debate has been sparked over the applicability of BITs in respect of sovereign debt instruments and protection against sovereign debt default. Much has been said on the ICSID arbitration initiated by 180,000 Italian bondholders against the Republic of Argentina under the Italy-Argentina BIT. See here, here and here. In 2011, the arbitral tribunal has upheld jurisdiction over this dispute. This case has been followed with wide interest, partly because it may set a precedent that could be followed by investors in sovereign debt instruments of other countries, such as Greece.
Greece has entered into over 40 BITs, amongst others with other countries in the Eurozone. Different from more recent investment treaties entered into by other countries, the BITs of Greece lack specific provisions on sovereign debt restructuring. More specifically, the BITs of Greece do not explicitly exclude sovereign debt restructuring issues from the scope of these treaties. This means that depending on the scope of the defined term ‘investment’ in individual BITs and the nature of (the purchase of) the sovereign debt instrument in dispute, claims in relation thereto may fall under the protection offered by such treaties.
None of Greece’s BITs exclude portfolio investments or government bonds from the scope of ‘investment’. Most of these BITs have an open-ended, broad asset-based definition of ‘investment’: ‘every kind of asset invested by an investor,’ followed by a non-exhaustive list of examples. Such definition suggests that the term embraces everything of economic value, virtually without limitation. A few BITs contain a definition – though open-ended – which is more limited, since they link the ‘asset’ to business activity: ‘every kind of asset connected with the participation in companies and joint ventures.’ In normal parlance, this does not include a stand-alone investment in a public debt instrument. A minority of these BITs explicitly mention ‘rights derived from … bonds and other kinds of interests in companies’ in the non-exhaustive list of ‘investment’. This could imply that a loan in and of itself does not qualify as an ‘investment’.
In view of the broad asset-based definition used in most of Greece’s BITs and the fact that sovereign debt instruments or its restructuring has not explicitly been excluded from the scope of the BITs, there is a strong inference that certain of these instruments fall within the scope (ratione materiae) of most of these treaties.
More generally, it should be pointed out that history shows that conflicts between States over default on sovereign debt are not a phenomenon of the last decade. In 1902, English, German and Italian armed forces invaded Venezuela to enforce claims related to State-issued bonds. This led to the Hague Convention II of 1907 Respecting the Limitations of the Employment of Force for the Recovery of Contract Debts (the Drago-Porter Convention). Under said Convention, States agreed to abstain from using armed force for the recovery of contract debts claimed from the government of one State by the government of another State as being due to its nationals. Said undertaking was, however, not applicable when – in summary – the debtor State refused to have the dispute submitted to arbitration or failed to submit to a subsequent arbitral award.
In view of the historical background of investment treaties and arbitration mechanisms contained therein, it can be strongly doubted whether the fact that a non-exhaustive list of assets qualifying as broad asset-based ‘investment’ as defined in a specific BIT does not include a specific reference to sovereign debt instruments should lead to the conclusion that it is not included therein or that it cannot be included therein per se. The default position may very well be that sovereign debt issuance falls under the scope of BITs with a broad asset-based ‘investment’ definition, unless the specific characteristics of (the purchase of the) financial instrument at stake do not meet the specific criteria contained in the relevant BIT.
Moreover, since most Greek BITs provide the possibility to opt for other forms of arbitration than ICSID arbitration, the jurisdiction requirement of ‘investment’ in article 25 of the ICSID Convention – which has been interpreted by some tribunals in a restrictive manner – should not pose an issue for bondholders seeking redress under these BITs.
Should it be established that the relevant Greek sovereign debt falls under the scope of individual BITs, the next question is whether the Greek CAC legislation triggers the substantive provisions of these treaties. Last year, UNCTAD noted carefully that “it cannot be ruled out” that sovereign debt structuring would breach provisions in BITs. See here. At the time of writing this blogpost, the exact details of the proposed Greek legislation had not yet been disclosed. In case under the proposed legislation Greek nationals will be treated different from foreign bondholders, this may trigger issues of national treatment. Moreover, a breach of standards of fair and equitable treatment may be at stake, in view of the coercive nature of the legislation and “take-it-or-leave-it” nature of the debt exchange. The new legislation could also lead to a breach of the so called umbrella clause, since Greece by introducing new legislation is to use a sovereign act to amend the terms of a contractual obligation, which basically means a unilateral amendment or breach of the original contract. Last but not least, Greece’s actions could also constitute a form of expropriation. As a result, it may very well be that the proposed CAC legislation will not be the last act in the Greek sovereign debt tragedy, and that it will continue in front of an international arbitral tribunal.
http://kluwer.practicesource.com/blog/2012/proposed-greek-collective-action-clauses-law-may-trigger-its-international-law-obligations/
Dank Aldy !!
It is said that Greece’s government has introduced legislation to its parliament this week that will allow it to enforce losses on bondholders in a write down of Greek debt. Unofficial sources have said that pursuant to the proposed legislation collective action clauses (“CACs”) will be introduced in Greek law bonds with retroactive effect. See here. As a result, pursuant to the proposed Greek law the conditions of the bonds may be amended and under the terms of the amended contracts bondholders that do not accept the proposed debt restructuring may be faced with an unilateral amendment of the conditions of the bonds, provided that a certain percentage of bondholders does accept the proposals. The new law raises questions of compatibility of this legislation with Greece’s obligations under international law, notably its bilateral investment treaties.
It is expected that the proposed legislation will affect 90% of outstanding Greek bonds, since these are governed by Greek law. These bonds currently do not contain CACs. Most of the remaining Greek sovereign debt is governed by English law, which does contain CACs. CACs are seen as a manner to restructure sovereign debt in an orderly manner.
In the past years, debate has been sparked over the applicability of BITs in respect of sovereign debt instruments and protection against sovereign debt default. Much has been said on the ICSID arbitration initiated by 180,000 Italian bondholders against the Republic of Argentina under the Italy-Argentina BIT. See here, here and here. In 2011, the arbitral tribunal has upheld jurisdiction over this dispute. This case has been followed with wide interest, partly because it may set a precedent that could be followed by investors in sovereign debt instruments of other countries, such as Greece.
Greece has entered into over 40 BITs, amongst others with other countries in the Eurozone. Different from more recent investment treaties entered into by other countries, the BITs of Greece lack specific provisions on sovereign debt restructuring. More specifically, the BITs of Greece do not explicitly exclude sovereign debt restructuring issues from the scope of these treaties. This means that depending on the scope of the defined term ‘investment’ in individual BITs and the nature of (the purchase of) the sovereign debt instrument in dispute, claims in relation thereto may fall under the protection offered by such treaties.
None of Greece’s BITs exclude portfolio investments or government bonds from the scope of ‘investment’. Most of these BITs have an open-ended, broad asset-based definition of ‘investment’: ‘every kind of asset invested by an investor,’ followed by a non-exhaustive list of examples. Such definition suggests that the term embraces everything of economic value, virtually without limitation. A few BITs contain a definition – though open-ended – which is more limited, since they link the ‘asset’ to business activity: ‘every kind of asset connected with the participation in companies and joint ventures.’ In normal parlance, this does not include a stand-alone investment in a public debt instrument. A minority of these BITs explicitly mention ‘rights derived from … bonds and other kinds of interests in companies’ in the non-exhaustive list of ‘investment’. This could imply that a loan in and of itself does not qualify as an ‘investment’.
In view of the broad asset-based definition used in most of Greece’s BITs and the fact that sovereign debt instruments or its restructuring has not explicitly been excluded from the scope of the BITs, there is a strong inference that certain of these instruments fall within the scope (ratione materiae) of most of these treaties.
More generally, it should be pointed out that history shows that conflicts between States over default on sovereign debt are not a phenomenon of the last decade. In 1902, English, German and Italian armed forces invaded Venezuela to enforce claims related to State-issued bonds. This led to the Hague Convention II of 1907 Respecting the Limitations of the Employment of Force for the Recovery of Contract Debts (the Drago-Porter Convention). Under said Convention, States agreed to abstain from using armed force for the recovery of contract debts claimed from the government of one State by the government of another State as being due to its nationals. Said undertaking was, however, not applicable when – in summary – the debtor State refused to have the dispute submitted to arbitration or failed to submit to a subsequent arbitral award.
In view of the historical background of investment treaties and arbitration mechanisms contained therein, it can be strongly doubted whether the fact that a non-exhaustive list of assets qualifying as broad asset-based ‘investment’ as defined in a specific BIT does not include a specific reference to sovereign debt instruments should lead to the conclusion that it is not included therein or that it cannot be included therein per se. The default position may very well be that sovereign debt issuance falls under the scope of BITs with a broad asset-based ‘investment’ definition, unless the specific characteristics of (the purchase of the) financial instrument at stake do not meet the specific criteria contained in the relevant BIT.
Moreover, since most Greek BITs provide the possibility to opt for other forms of arbitration than ICSID arbitration, the jurisdiction requirement of ‘investment’ in article 25 of the ICSID Convention – which has been interpreted by some tribunals in a restrictive manner – should not pose an issue for bondholders seeking redress under these BITs.
Should it be established that the relevant Greek sovereign debt falls under the scope of individual BITs, the next question is whether the Greek CAC legislation triggers the substantive provisions of these treaties. Last year, UNCTAD noted carefully that “it cannot be ruled out” that sovereign debt structuring would breach provisions in BITs. See here. At the time of writing this blogpost, the exact details of the proposed Greek legislation had not yet been disclosed. In case under the proposed legislation Greek nationals will be treated different from foreign bondholders, this may trigger issues of national treatment. Moreover, a breach of standards of fair and equitable treatment may be at stake, in view of the coercive nature of the legislation and “take-it-or-leave-it” nature of the debt exchange. The new legislation could also lead to a breach of the so called umbrella clause, since Greece by introducing new legislation is to use a sovereign act to amend the terms of a contractual obligation, which basically means a unilateral amendment or breach of the original contract. Last but not least, Greece’s actions could also constitute a form of expropriation. As a result, it may very well be that the proposed CAC legislation will not be the last act in the Greek sovereign debt tragedy, and that it will continue in front of an international arbitral tribunal.
http://kluwer.practicesource.com/blog/2012/proposed-greek-collective-action-clauses-law-may-trigger-its-international-law-obligations/
Dank Aldy !!
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