Sovereign Default Disputes in Investment Treaty Arbitration: Jurisdictional Considerations and Policy Implications

Abstract

In the aftermath of Argentina’s 2001 economic crisis, creditors not participating in the country sovereign debt restructuring insisted on full payment. The triplet of investment arbitration decisions upheld jurisdiction over the mass claims presented by the holdout creditors.1 Two cases were, however, accompanied by forceful dissents. Subsequently, opinions diverged into two camps on the legal appropriateness and policy desirability of using investment arbitration for solving sovereign default disputes: the first camp supporting the majority’s view, and the second siding with the dissenting arbitrators. This article analyses the two approaches as far as jurisdictional requirements for hearing the sovereign bond disputes are concerned as well as potential policy consequences of the use of investment arbitration for these types of disputes. The article assumes a critical position towards the reasoning of the three awards, mostly due to the misconceived apprehension of the requirement of territoriality. In the policy part, the article argues that even if one assumes that enhancement of the creditor’s rights is desirable (something which is debatable), investment arbitration does not seem to bring advantages towards that goal. First, the argument of better enforcement of arbitral awards seems to be more apparent than real. Second, as Bilateral Investment Treaties base their protection on nationality, this fact creates unjustifiable preference towards certain creditors and increases unpredictability. This uncertainty upsets the original contractual bargain agreed on the issuance of bonds and has negative repercussions in financial markets. The ad hoc nature of investment arbitration only furnishes the uncertainty. Lastly, investment arbitration is a tool for correcting past grievances. Tools for dealing with orderly sovereign defaults should focus on the preventive aspects of sovereign defaults. As a robust multilateral treaty system dealing with sovereign defaults is currently politically unfeasible, a better solution is to reinforce the current system of contractual protections such as collective action clauses or exit consents. Rather than attempting to expand the role of arbitration, resolving sovereign debt issues should be left to actors in financial markets (lenders and borrowers). Financial markets have always proved capable of dealing with sovereign defaults.