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For the Orphan, the Widow, the Poor: How to Curb Enforcing by Vulture Funds against the Highly Indebted Poor Countries

Published online by Cambridge University Press:  08 March 2018

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Abstract

The dynamic of the secondary market for sovereign debt has been affected by the presence of a peculiar category of holders: vulture funds. These funds, specializing in purchasing the debt of sovereign states in distress at a discounted market price, stay aloof from restructuring processes and then enforce their claims in courts to secure the face value. For low revenue debtor countries, paying the claims may involve reducing the resources available for basic services to the population. For very poor countries this also involves a significant regression in terms of development. Against this background, the purpose of this work is to inquire whether and to what extent there exists a rule permitting the suspending and rescheduling of payments so as to pay dues without impairing services. In order to find such a rule, inquiry is to be made into general norms: necessity and public policy. It is under the umbrella of the truly international public policy that the duty of a state to provide certain basic services to its population can be subsumed and the corollary of the suspension and rescheduling of these payments consistently with this duty can be applied.

Keywords

debt sustainabilitylegal defencepublic policysovereign debtvulture funds
Type
INTERNATIONAL LAW AND PRACTICE
Information
Leiden Journal of International Law , Volume 31 , Issue 2 , June 2018 , pp. 363 - 381
Copyright
Copyright © Foundation of the Leiden Journal of International Law 2018 

1. Introduction

Economic and social rights cannot be fully realized without an adequate level of resources.Footnote 1 This is particularly true in relation to highly indebted poor countries (HIPCs), which are characterized by a chronic lack of means and a heavy debt burden that impede a real improvement in living conditions.Footnote 2 This situation has many causes, some structural, some contingent. Among the latter, recent practice has recorded instances of claim enforcements that have affected the budgetary resources appropriated for social spending. These enforcements have been mainly made by vulture funds, i.e., investment funds specializing in purchasing debts of sovereigns in distress at a price below face value with the purpose of obtaining the nominal amount in court.Footnote 3 As a product of this litigation, debtor countries have been obliged to divert resources previously allocated to social spending in favour of victorious creditors. Although vulture funds play a residual role in determining the socio-economic situation of poor debtors, to understand what legal rules can be validly resorted to in order to curb their judicial activism may help to shed light on what rules are pleadable whenever debt burden become unsustainable.

Against this background, the purpose of this work is to analyze the dynamics of private loans to developing countries, describe the manifold enforcements of claims by vulture funds, focus on the effects of claim enforcement in relation to HIPCs, and identify what legal rules may come into play in this context. In relation to enforcement, the practice records instances of claim and judgment enforcement against a wide spectrum of assets: funds imputable to international financial institutions, funds for research projects, war vessels, embassy accounts, funds for development and funds for public expenditure. All this activism is made possible by the fact that vulture funds have not exchanged bonds in their holdings under a restructuring programme. As they hold credits bearing the original terms of the loan, they are entitled to claim in full the nominal capital plus accrued interest.

In relation to legal rules, the key point is whether there exists a sustainability rule capable of providing a temporary but effective defence by staying and rescheduling claims enforcement until servicing the debt becomes sustainable. The inquiry here will be made, in the first place, into the legal frameworks specifically designed to providing a common playing field for sovereign debt and subsequently into general norms, such as necessity and public policy.

2. Private lending to sovereign borrowers

In the years immediately after the Second World War, the landscape of sovereign financing was mainly characterized by bilateral and multilateral lending. Nevertheless, these forms of lending brought with them certain problems. On the one hand, bilateral loans were often linked to the purchase of products and services supplied by the national industries of the lending country (so-called ‘tying’).Footnote 4 On the other hand, multilateral loans, though to different degrees, were subordinated to a set of conditions (the so-called ‘policy of conditionality’) involving heavy intrusion into the domestic affairs of the borrowing countries.Footnote 5 As a result, sovereign borrowers began to turn to a category of lenders whose lending policy did not depend upon these conditions: commercial banks.Footnote 6 This lending channel was active until the mid-1980s when the debt crisis of the Latin American countries marked the end of financing state deficits through bank loansFootnote 7 and the resumption of bonded loans as the major private source of sovereign financing.Footnote 8

A collateral effect of this crisis was the emergence of a secondary market for bank loans that were purchased by various types of investors, including vulture funds.Footnote 9 This practice has significantly increased in connection with bonded loans as financial instruments are dematerialized and can be easily purchased worldwide through electronic platforms.Footnote 10 However, to be successful, the strategy of claiming the nominal amount in courts requires that debt instruments bear the original terms of the loan. This usually occurs when, under the restructuring process, the debt swap takes place without amending the original terms of the loan because of the impossibility of achieving the necessary quorum. With respect to bonded loans, until the mid-2000s financial practice recorded a sharp division between bond issues governed by New York law, under which payment terms could be modified by unanimity, and bond issues governed by English law, under which payment terms could be modified by majority.Footnote 11 The progressive acknowledgement of collective action clauses (CACs), that permit the modification by a majority of all terms of the loan, has overcome this division.Footnote 12 However, the fact that old loans do not contain CACs and that a quorum is not always achievable under loans with CACs still permits a certain room for manoeuvre in favour of judicial activism by vulture funds.

3. Worldwide enforcing

The judicial activism of vulture funds (a sort of ‘vulturism’) has involved a wide spectrum of sensitive assets and generated great concern in the international community. The following analysis offers a description of the most peculiar enforcements.

A first set of actions involved interference with multilateral organizations. In 2005, certain vulture funds appealed against an order of the New York Southern District Court vacating restraining notices and orders of attachment related to an account of the Banco Central de la Republica that Argentina held at the Federal Reserve Bank of New York. The Court of Appeals for the Second Circuit affirmed the order of the District Court on the assumption that reimbursements to the IMF did not qualify as a commercial activity.Footnote 13 Along the same lines, in July 2010, the Swiss Bundesgericht rejected the request for attachment filed by certain vulture funds against Argentine funds deposited with the Bank for International Settlements on the ground of the immunity of these assets.Footnote 14

A second set of actions involved interference with the exercise of certain sovereign functions. In 2011, the District Court for the Central District of California – with reference to the participation of Argentina in an international satellite programme – found that the mission to collect data on ocean salinity levels amounted to an exercise of sovereign powers.Footnote 15 In October 2012, vulture funds successfully filed a claim with the High Court of Ghana, on sums awarded by the New York District Court, to seize an Argentine frigate.Footnote 16 In turn, Argentina filed a request for provisional measures to the International Tribunal for the Law of the Sea (ITLOS), claiming the immunity of the warship. Pending the constitution of the arbitral tribunal, the ITLOS issued an interim order releasing the Argentine frigate. It held, inter alia, that, as a warship is an expression of the sovereignty of the state of flag, to prevent it by force from discharging its mission and duties would impair international relations.Footnote 17 In the same vein, vulture funds tried to seize the funds of the Argentine embassy in Brussels. In June 2011, the Cour d'appel of Brussels ruled that a general waiver of immunity in the terms of the loan made those funds attachable. This judgment was reversed in November 2012 by the Belgian Cour de cassation, which held that the prohibition of attachment against the bank accounts of a diplomatic mission contained in the Convention on State ImmunityFootnote 18 did, in fact, correspond to a customary norm and that this immunity was also consistent with the customary rules encapsulated in the Vienna Convention on Diplomatic Relations.Footnote 19

3.1. Beggaring the poor

A specific set of actions has involved interference with resources earmarked for development, both in terms of aid to development by donors and in terms of social spending by debtor countries. In terms of aid to development, in 1985 the Dutch Hooge Raad ruled that the financial resources granted to Suriname in the framework of an agreement for development were non-attachable for reasons of public policy.Footnote 20 Conversely, in 1994 the English Court of Appeal ruled in favour of the attachment of funds granted to Sierra Leone by the European CommunityFootnote 21 within the framework of the Third Lomé Convention.Footnote 22 The Court of Appeal held that the relationship between the European Community and Sierra Leone was governed by international law and not by English law, with the result that no trust relationship arose that would have permitted the insulation of these funds and the subtraction of them from enforcement.Footnote 23 Contrasting results came from the lawsuits brought before Italian courts against Argentina following the country's default. In July 2002, the Tribunale of Rome in the first instance had granted a pre-judgment attachment against certain funds held on a line of credit provided within the framework of a co-operation agreement on behalf of Argentina by the Ministry of Foreign Affairs; however, in the course of the judgment on merits, the point was reversed in favour of Argentina on the basis of the immunity rule.Footnote 24

In terms of national budget, the effects of lawsuits instituted by vulture funds are significant for HIPCs, especially where part of the resources freed by debt reliefFootnote 25 is diverted from social and development programmes and applied to repay creditors.Footnote 26 The most striking instance of vulture funds litigation against HIPCs is constituted by Hamsah Investment Ltd & Wall Capital Ltd v. the Republic of Liberia (non-reported). In 1978, Liberia borrowed US$6.5 million from Chemical Bank. The bank sold the debt to FH International Financial Services Inc. and Sifida Investment Company S.A., which subsequently brought an action for its recovery before a New York court. The court entered a default judgment against Liberia for approximately US$18.4 million. Following the judgment, the debt was assigned several times until it was purchased by Hamsah Investments Ltd. and Wall Capital Ltd. In June 2008, the two funds instituted proceedings before the High Court in London to register and enforce, as an English judgment, the judgment of the New York court. In November 2009, the High Court ordered Liberia to pay the claimants over US$20 million, though acknowledging in principle that Liberia was ‘short of money’. The sum awarded in the judgment amounted to 5 per cent of Liberia's annual budget for the fiscal year 2008 and affected significantly the country's social expenditure. The sum corresponded to the country's entire education budget and 150 per cent of its health budget in 2008.Footnote 27

A similar path characterized the case of Donegal v. Zambia.Footnote 28 In 1979 Romania lent Zambia US$15 million, which the latter used to purchase tractors and other agricultural machinery from the former. Unable to repay the loan, Zambia defaulted. In 1998, Romania agreed to sell the debt to an investment fund – Donegal International – for US$3.2 million. In September 2002, after having unsuccessfully attempted to swap the debt for investments in Zambia, Donegal International commenced litigation in the British Virgin Islands for nearly US$43 million. In April 2003 Zambia signed a settlement agreement with Donegal International under which it agreed to waive sovereign immunity and pay around US$15 million out of a US$44 million face value. It also agreed to penal interest rates in the event of default and to have any dispute determined under English law and jurisdiction. Zambia paid a total of US$3.4 million in three instalments and subsequently stopped paying, arguing that the agreement was tainted with corruption and had been signed without the necessary authority. In 2006 Donegal International instituted legal action against Zambia for US$55 million, a sum representing the original principal plus interest. In February 2007, the English High Court ruled in favour of Donegal International. It ordered Zambia to pay US$15.4 million. That amount was equivalent to 65 per cent of the country's savings in debt relief under the HIPC Initiative.Footnote 29 Under the HIPC Initiative, Zambia could have expected 88 per cent cancellation of its debt. A good deal of those savings went to pay vulture funds. Significantly, for the first time a municipal court did not award the full value of the debt.Footnote 30 Nevertheless, this decision was not so much ascribable to an equitable approach by the court but rather to the fact that the penal interest rate was illegal and thereby was not enforced.Footnote 31

Similar to Donegal is FG Hemisphere v. Democratic Republic of Congo (DRC). In 1980 the DRC made a credit agreement with Energoinvest for the construction of a high-voltage electric power transmission facility. Soon the debtor country defaulted and in 2003 the International Chamber of Commerce made two arbitral awards in favour of the creditor, subsequently confirmed by the Court for the Southern District of New York.Footnote 32 At that point, Energoinvest ceded the right to recover the claims to FG Hemisphere, a US investment fund, in exchange for US$37 million. In order to secure its claims, FG Hemisphere obtained enforcement judgments from several courts around the world. In 2010 the Court of Appeal of Honk Kong froze US$100 million of a signing bonus for a US$6 billion minerals-for-infrastructure agreement between the DRC and China. For a country with one of the lowest human development index rankings, paying debts has involved a negative impact on human rights.Footnote 33

The DRC played a major role in another lawsuit. In 2008 Themis Capital and Des Moines Investment, two US investment funds, purchased certain debts of the DRC that originated from syndicated loans made in the 1980s. In 2009 the two funds filed a lawsuit with the Southern District Court of New York and in 2014 the court held that the plaintiffs were entitled to recover damages that included principal and interest plus compound interest on the interest accrued on the unpaid principal for nearly US$70 million. The court found that the DRC central bank had always had in its holdings foreign currency reserves exceeding the amount of plaintiffs’ claims,Footnote 34 without considering that this situation was ascribable to the international debt reduction programmes.Footnote 35

The connection between paying debt and reducing services is unquestionable. The UN Independent Expert on sovereign debt and human rights has found that where debtor countries have had their foreign debt forgiven, they have been able to invest more in public services such as health care, education, water and sanitation, and to abolish or reduce fees previously introduced as part of austerity programmes imposed by international financial institutions.Footnote 36 By contrast, when debt is regularly paid social investment is reduced and the right to an adequate standard of living – i.e., right to health, food, shelter, education – is negatively affected therefrom.Footnote 37

4. Enforcing the sustainable

The cases analyzed above call for a sustainability rule capable of providing an effective shield against vulture funds. Under the IMF Debt Sustainability Analysis sustainability is excluded if a debt restructuring is already needed (or expected to be needed), the borrower keeps on indefinitely accumulating debts faster than its capacity to service them, or the borrower lives beyond its means by accumulating debt in the knowledge that a reduction will be needed to service these debts.Footnote 38 For low-income countries, the IMF and the World Bank in 2005 introduced a Joint Debt Sustainability Framework. Under this framework, debt sustainability analyses are conducted regularly on the basis of an assessment of a country's projected debt burden over 20 years and its vulnerability to external and policy shocks, an assessment of the risk of debt distress in that period in the light of indicative debt burden thresholds, and recommendations for borrowing and lending aimed at limiting the risk of debt distress.Footnote 39 Under the HIPC InitiativeFootnote 40 a debt is unsustainable if the net present value of the debt-to-export ratio for an eligible country, also in the presence of debt relief actions, surpasses the threshold of 150 per cent.Footnote 41 The major criticism of these debt analyses is that they do not take into sufficient consideration the social problems involved in repayments. Footnote 42 To respond to this criticism, it has been proposed to incorporate in the sustainability analysis parameters concerning the preservation of the fundamental economic and social rights of the population.Footnote 43 In effect, ‘debt sustainability is only achieved when debt service does not entail intolerable sacrifices for the well-being of society, does not lead to violations of economic and social rights and does not prevent the attainment of international development goals’.Footnote 44

5. Sustainability under sovereign debt frameworks

The quest for a sustainability rule inclusive of social and economic rights and capable of constituting a legal barrier to vulture funds must necessarily take into consideration the legal frameworks specifically designed as a response to their activism.

5.1. Bilateral responses

The judicial activism by vulture funds against donors’ resources earmarked for development co-operation has prompted certain domestic responses. In 2007, a bill was introduced in the French Parliament under which a French judge would have discretion in enforcing payments against a sovereign debtor in default.Footnote 45 This attempt was not crowned with success and the law failed to pass. In contrast, in 2008, the Belgian Parliament passed legislation designed to prevent funds appropriated by the Belgian government for development co-operation from becoming an object of attachment by the creditors of recipient states. Footnote 46 In the same vein, in 2009, a bill was introduced in the US House of Representatives to prevent speculation and profiteering in the defaulted debt of certain poor countries.Footnote 47 This proposal was ultimately not approved by Congress. More extensively, in 2010, the UK Parliament passed the Debt Relief (Developing Countries) Act. Under this Act, a UK court cannot render a judgment, or enforce a foreign judgment or arbitral award, against an HIPC under which private creditors are enabled to recover their credits in excess of the sustainable level as calculated under the HIPC Initiative.Footnote 48 It applies to debts incurred prior to its enactment and prior to the decision point under the HIPC Initiative; these debts must be public (also municipalities’ debts) or backed by public guarantee and held by persons non-resident in the debtor country. Debts related to payment of goods and services are excluded as much as debts with maturities shorter than one year.Footnote 49 The ceiling in recovering applies irrespective of the governing law. The whole Act implies that is against UK public policy to enforce a claim or a judgment that runs counter to HIPCs debt sustainability.Footnote 50

However, the main purpose of these pieces of national legislation is not so much to protect the interests of the recipient countries, but rather to deploy a firewall for the funds appropriated by bilateral and multilateral actors for development co-operation.Footnote 51

5.2. Multilateral responses

More far-reaching have been the multilateral responses. In January 2012, the United Nations Conference on Trade and Development (UNCTAD), following a Resolution by the UN General Assembly stressing the importance of responsible financing in which public and private creditors and sovereign debtors share responsibility for preventing unsustainable debt situations,Footnote 52 adopted the Principles on Promoting Responsible Sovereign Lending and Borrowing.Footnote 53 The phenomenon of vulture funds is not explicitly addressed in this context. Nevertheless, Principle 7 affirms that, when a sovereign debtor is clearly unable to service its debt, all lenders must behave in good faith and with a co-operative spirit towards a restructuring process and creditors should operate in favour of a quick and orderly resolution of the problem. This statement has two implications. First, it acknowledges, though implicitly, the issue of debt sustainability as a benchmark for restructuring. Second, it indicates that a creditor who purchases a debt instrument of a sovereign in distress with the aim of forcing preferential treatment outside a consensual workout is acting abusively.Footnote 54 However, this latter implication must be correctly understood: the abuse does not lie in the purchase of the debt instrument, but in the attempt to secure a more favourable settlement of the claims. This involves not just a mere lack of participation in the restructuring process, but some attempt to enforce preferential claims in court. It is therefore in courts and tribunals that such abusive behaviour is to be appreciated, irrespective of its formal legal qualification.Footnote 55 The UNCTAD Principles have not been formally incorporated into a binding instrument for two reasons: this choice is consistent with the soft law characterization of international financial law;Footnote 56 and their purpose is not so much to establish rights and obligations but rather to identify basic rules and best practices. This second reason reflects the dynamic and flexible nature of the Principles,Footnote 57 and also indicates their non-uniform legal status.Footnote 58 Although some incremental acknowledgement of these Principles in restructuring and litigation may be recorded, it is too early to qualify them as proper legal rules.Footnote 59

Subsequent to the Principles of Responsible Financing, the UNCTAD focused on the specific issue of debt restructuring and in 2015 endorsed a Roadmap Guide on Sovereign Debt Workouts based on five principles, including sustainability.Footnote 60 In this context, a debt is unsustainable as long as it cannot be serviced without impairing the social and economic development of the population (Principle 5). This rule would constitute, at least, an emerging principleFootnote 61 and include both a procedural and a substantive element. Under the procedural element, a restructuring process should initiate as soon as debt service becomes unsustainable; under the substantive element, a restructuring process should aim at the sustainability of the indebtedness, taking into account social and economic considerations.Footnote 62 The UNCTAD Roadmap Guide also deals with the issue of holdout litigation in relation to those creditors that are not bound by the terms of restructuring. To prevent vulture funds’ activism the suggestion is to limit the recoverable amount to that agreed on in restructuring processes by resorting to the defence of good faith.Footnote 63 However, the purpose of the Roadmap is not so much to establish rules as to provide a benchmark in debt restructurings and claim adjudications.

The phenomenon of vulture funds is more widely addressed in the Human Rights Council (HRC) Guiding Principles on Foreign Debt and Human Rights endorsed by the UN Human Rights Council in 2012.Footnote 64 The HRC Principles are centred on the primacy of human rights, in particular economic, social and cultural rights, and on their non-retrogression in relation to state indebtedness. In this connection, the HRC Principles underscore that debt sustainability analysis must not be limited to economic considerations but must also evaluate the impact of debt burden on a country's ability to achieve the Millennium Development GoalsFootnote 65 and to create the necessary conditions for the realization of all human rights (Principle 65). The HRC Principles deal with vulture funds’ activism in two respects. Upstream: loan agreements should contain legal restrictions on the assignment or sale of credits to third parties without the informed consent of the debtor (Principle 59) and, in any case, credits should not be sold to holdout creditors (Principle 62). Downstream: the amount recoverable by those who have acquired sovereign debts after the failure of negotiations should not surpass that set out in the terms of the loan (Principle 60) and, in relation to poor countries, it should not exceed that received by other creditors under international debt relief mechanisms, i.e., HIPC Initiative and MDRI (Principle 61). However, the HRC Principles – more political in character and scope than the UNCTAD Principles – do not pursue the creation of new rights or obligations under international law, nor do they replace other mechanisms designed to address aspects of the sovereign debt problem. Rather, their normative contribution consists in identifying existing basic human rights standards applicable to sovereign debt and related policies, as well as in elaborating the implications of these standards (point 17).

The problem of vulture fund activism has also been addressed in the UN Basic Principles on Sovereign Debt Restructuring Processes adopted by the UN General Assembly in September 2015.Footnote 66 In relation to sustainability, Principle 8 declares that sovereign debt restructuring should also promote inclusive growth and sustainable development, by minimizing the social and economic costs. In relation to holdout litigation, Principle 9 affirms that minority creditors should not impair the outcome of restructuring processes; moreover, in order to prevent disruptive litigation CACs should be inserted in all terms of the loans.

All these pieces of soft law, though to different degrees, are intended more to guide than to oblige. Their rules are certainly suited to constitute a benchmark in the drafting of the loan agreements and in the restructuring processes. Still, their lack of a proper normative status impedes the sustainability rule, as described above, being successfully pleaded and applied in court.Footnote 67 It is then necessary to seek other umbrellas under which this rule can effectively operate.

6. Suspending the unsustainable

On assuming that the content of the sustainability rule consists of paying debts without impairing essential services to the population, its corollary is that a sovereign debt claim can be enforced only when and to the extent that enforcement does not negatively affect the provision of these essential services. This implies a suspension of enforcement and a rescheduling of payments consistently with debt sustainability.

In this context, suspension and rescheduling constitute an acceptable compromise between the traditional basic rule of the binding force of contracts (pacta sunt servanda),Footnote 68 that can hardly permit a straightforward reduction of debt,Footnote 69 and the necessity to ensure the provision of certain basic social services to the population. The sustainability rule and its corollary may operate under two general norms: necessity and public policy.

Necessity and public policy belong to two different realms. Necessity is a circumstance precluding wrongfulness that excuses the failure to apply an international law norm. Public policy has a double declination: as a conflict-of-laws rule, it impedes the recognition and execution of a foreign act or the application of a foreign law; as a substantive law rule, it impedes the enforcement of a contract. The point is to appraise under which umbrella the sustainability rule and its corollary of suspension enjoy better space for manoeuvre.

6.1. Suspending under necessity

The issue of debt sustainability may come into play in connection with the necessity by the debtor state to preserve an essential interest of its own – specifically, the interest to provide certain basic services to the population.

In the French Company of Venezuelan Railroads case, the French-Venezuelan arbitral tribunal laid down, as a general rule, that the revenues of a country are mainly devoted to its self-preservation.Footnote 70 As a corollary, in the Russian Indemnity arbitration, the Permanent Court of Arbitration underscored that the duty to perform a treaty obligation ceases when the very existence of the obligor state is impaired.Footnote 71 Nevertheless, a state is also entitled to suspend the payments on its debt as long as doing otherwise would negatively affect the provision of public services; in fact, the primary obligation of a sovereign debtor is not so much to pay its debts but rather to exert its public functions.Footnote 72 The point was acknowledged in the Société commerciale de Belgique case, where the prevalence of the duty of a state to preserve its fundamental functions on the duty to fulfil financial obligations was advanced by the Greek counsel Youpis and accepted by the Belgian counsel Sand.Footnote 73 Although the Permanent Court of Justice acknowledged only implicitly this understanding between the parties,Footnote 74 this endorsement marked the transition from the necessity to preserve the very existence of the state to the necessity of preserving an essential interest of it.Footnote 75

Currently, the need to preserve an essential interest of its own may be invoked by a state under the umbrella of necessity. Article 25 of the International Law Commission's Articles on State ResponsibilityFootnote 76 stipulates that necessity cannot be invoked as a circumstance precluding the wrongfulness of an act not in conformity with an international obligation, unless the act is the sole means for the state to safeguard an essential interest against a grave and imminent peril and it does not seriously impair an essential interest of the state towards which the obligation is due or an essential interest of the international community. In any case, necessity cannot be invoked when the international obligation in question excludes this possibility or the state has contributed to the situation of necessity.Footnote 77 In the context of debt sustainability it is to be appreciated that the notion of essential interest is not confined to the existence of the state, but also covers the economic survival of the state and the food supply of the population.Footnote 78 However, it is not easy to prove that the suspension of payments constitutes the sole means to preserve the essential interest of the state to provide certain basic services to the population.Footnote 79 Furthermore, the suspension operates for a strict period of time against exceptional occurrences.Footnote 80 Finally, the customary law defence of necessity would not operate in relation to claims brought by individuals.Footnote 81

The necessity to preserve an essential interest of the state may be appreciated under the emergency clause usually reproduced in the Bilateral Investment Treaties (BITs).Footnote 82 Broadly speaking, the clause stipulates that the parties are allowed to apply those measures necessary for the maintenance of public order, the fulfilment of their obligations with respect to international peace, or the protection of their essential security interests.Footnote 83 The meaning of essential interests for state security is sufficiently broad to embrace also major economic emergencies.Footnote 84 In the context of debt sustainability, the suspension of payments may be instrumental to preserve essential public services such as education and public health.Footnote 85 Nevertheless, ‘[e]mergency periods should be only strictly exceptional and should be applied exclusively when faced with extraordinary circumstances’.Footnote 86 Also, in this case, the suspension of payments would operate solely in relation to a circumscribed lapse of time.

6.2. Suspending under public policy

The circumscribed and limited operation of suspending under necessity makes it necessary to resort to another route in order to find a better playing field for the sustainability rule: the general clause of public policy.Footnote 87 Public policy has two fundamental forms: internal public policy, which renders a contract invalid and unenforceable, and international public policy (or conflictual public policy), which impedes the application of a provision of a foreign law or the recognition and enforcement of a foreign act.

Conceptually speaking, international public policy is stricter in scope and mandate than internal public policy; otherwise, the whole private international law system would be seriously impaired.Footnote 88 As a product of this, municipal courts are less inclined to apply public policy in cases involving an international element than they would be in cases of purely domestic characterization.Footnote 89 That implies that ‘not every rule which belongs to the ordre public interne is necessary part of the ordre public externe ou international’.Footnote 90 This narrowness is even more evident in connection with the EU conflict of laws rules. Under the Brussels I Regulation, the recognition and enforcement of a foreign judgment may be refused as far as it is ‘manifestly’ contrary to the public policy of the seized forum (Arts. 45 and 46).Footnote 91

Although international public policy has a narrower operation than internal public policy, it possesses a wider content as it incorporates certain rules of international law. In In re Claim by Herbert Wagg & Co. Ltd., the Court of Chancery laid down that it is part of English public policy that courts should give effect to clearly established rules of international law.Footnote 92 In this vein, in Oppenheimer v. Cattermole, the Court of Appeal refused to apply a foreign law which constituted a grave infringement of fundamental human rights,Footnote 93 while in Kuwait Airways v. Iraqi Airways the House of Lords refused to enforce a foreign act which was adopted under a jus cogens violation.Footnote 94 These international elements of the international public policy of the forum belong to the so-called ‘truly international public order’ (or ‘transnational public policy’).Footnote 95 The truly international public order:

is the one that establishes universal principles, in various fields of international law and relations, to serve the higher interests of the world community, the common interests of mankind, above and sometimes even contrary to the interests of the individual nations.Footnote 96

From a substantive standpoint, this truly international public order is constituted not solely by peremptory norms and fundamental human rights but also by rules progressively developed under the arbitral practice, such as environmental protection and the prohibition of corruption.Footnote 97 Although, so far, no judge or arbitrator has specified which rules of this truly international public order apply to sovereign debt, it may be reasonable to assume that the duty of a state to ensure certain social and economic rights to its population may be subsumed under this category.Footnote 98 This duty is evaded to the extent that, in many poor countries, the repayment of debt is often undertaken at the expense of social investment in services aimed at promoting the realization of basic human rights (education, health, food, water and housing).Footnote 99 The acknowledgment of this truly international public order rule within the international public policy of the forum involves suspending the recognition and enforcement of a foreign judgment or an arbitral award until and to the extent that it is possible to combine servicing the debt with the provision of essential services. In detail, this would imply recognizing the foreign decision but phasing the enforcement of payments so as ensure the provision of services.Footnote 100

The case is different when the issue is not the enforcement of a foreign act but the enforcement of a claim. In this context, the benchmark is normally constituted by the internal public policy of the forum. Nevertheless, the duty of a state to provide certain basic services in the face of debt repayment may again come into play when the claim is governed by foreign law. Under the conflict of law rules for contracts, international public policy has both a negative element that impedes the application of a foreign law and a positive element that involves the application of overriding mandatory rules.Footnote 101 These overriding mandatory rules consist of provisions the respect for which is regarded as crucial for safeguarding the public interest of a specific country, such as its political, social or economic organization, which are to be applied irrespective of the applicable law.Footnote 102 Their sources may be both public law and international law.Footnote 103 The international element reasonably encompasses truly international public order rules, including the duty for a state to provide certain essential services. In effect, if we acknowledge that the need to ensure the financial stability of a country belongs to the number of overriding mandatory rules as it serves the purpose of avoiding the disruption of a society,Footnote 104 we should likewise concede that the duty of a state to provide certain services with the corollary of the suspension of enforcement and/or rescheduling of payments is subsumable there- under as far as it pursues the same aim. In this context, the overriding mandatory rules of a debtor country may come into play not only on the basis of the applicable law, but also on the basis of law of the forum (indirect application) and of the law of the place of performance (direct application) (Art. 9(2)(3) Rome I Regulation).Footnote 105

This umbrella, though, leaves the case of the claim being governed by the law of the forum uncovered. However, English public policy would provide a certain room for manoeuvring for the sustainability rule in this context.Footnote 106 Under English law it is against public policy to enforce an agreement that would deprive a party of its means of living.Footnote 107 By analogy, this test can be applied when paying the claims would imply a state reducing essential services to the population significantly. In this vein, the Debt Relief ActFootnote 108 has introduced a ceiling in relation to the enforcement of both foreign judgments and domestic claims. This public policy rule has underpinnings both in international public policy and in internal public policy. As a product of that, even though in force of a statute, the sustainability rule finds application in the ambit of domestic cases. However, in other jurisdictions the internal public policy may be not so far-reaching to include a sustainability rule.Footnote 109 In these cases an alternative route may be taken to achieve the same result: on the basis of the connecting factor of the presence of a foreign state as party to the lawsuit, it may be reasonable to argue in favour of the application also in this context of the overriding mandatory rules of that state that include the sustainability rule.Footnote 110

7. Conclusions

To enforce a debt claim against an HIPC may affect significantly the resources earmarked for that country's social services and involve consequent regression on the route to development. This is the product of judicial activism by vulture funds. In this connection, it becomes crucial to seek what rules may constitute a legal barrier to this activism. The substance of this defence is given by the sustainability of the debt. In the sovereign debt context, sustainability should not merely incorporate the economic and financial projections of the indebtedness of a given country, but also consider the economic and social rights of the population. As a result, claims should be suspended and payments rescheduled so as not to impair the provision of essential services.

Traces of this sustainability rule emerge from the legal frameworks on sovereign debt. Nevertheless, its application in the field of sovereign debt litigation is hindered by two factors: it is a soft law rule (at the best an emerging principle) and is mostly tailored to restructuring processes. The alternative route is, then, to look at general norms under which this rule may operate. In terms of necessity, a state is entitled to suspend an obligation provided that this suspension is the sole means of safeguarding an essential interest of its own and the state has not contributed to the situation of necessity. The notion of essential interest is sufficiently broad to also cover the provision of essential services. Nevertheless, the requirement of sole means and the absence of contribution by the state greatly restrict the operation of a necessity defence. Moreover, it is questionable that necessity can be applied in relation to private parties. Public policy seems more suitable to acknowledge this sustainability rule. In this context, this rule may come into play under two different profiles. In relation to the recognition and enforcement of a foreign judgment this rule would be applied under the head of international public policy of the forum. In relation to the enforcement of a contractual claim, this rule would be applied under the head of overriding mandatory rules. In both cases, it involves a suspension of the enforcement and a rescheduling of payments so as to ensure the provision of essential services.

References

1 The point is well underscored by the 1966 International Covenant on Economic, Social and Cultural Rights, (1967) 6 International Legal Materials 360, which stipulates that each party undertakes to take steps, individually and through assistance and co-operation, to the maximum of the available resources with the view of a progressive realization of the rights recognized in the Covenant (Art. 2(1)).

2 The most striking instance of how debt repayment may affect living conditions is constituted by the case of Malawi. In 2002 Malawi, one of the poorest countries in the world, decided to sell the maize from its food reserve agency in order to raise funds to pay loans. As a result, 7 million people out of a population of 11 million, were left facing serious food shortage. See Report of the independent expert on the effects of foreign debt and other related international financial obligations of States on the full enjoyment of all human rights, particularly economic, social and cultural rights, UN Doc. A/HRC/11/10 (2009), para. 30.

3 The vulture funds operate in this way: target sovereign debtors with distressed economies and weak capacity of legal defence; take advantage of lack of regulation in the secondary markets; refuse to take part in debt restructuring processes and wait until the financial situation of the debtor country has ameliorated to get a better deal (which debtor countries are inclined to concede in order to re-enter financial markets); sue the debtor country for full repayment of the face value of the bonds plus interest and delay penalties; seek enforcement of claims everywhere; secure huge profits; operate in jurisdictions where there is no obligation to disclose information on benefits or ownership. See Report of the Human Rights Council Advisory Committee on the activities of the vulture funds and the impact on human rights, UN Doc. A/HRC/33/54 (2016), paras. 6–8.

4 See R.C. Riddell, Does Foreign Aid Work? (2007), 99–101.

5 The International Monetary Fund (IMF) conditionality entailed deep interference in the domestic affairs of the borrowing states. See E. Denters, The Law and Policy of IMF Conditionality (1996). To appease this criticism, in 2002 the IMF adopted the new Guidelines on Conditionality which are based on the principles of country ownership and parsimony of conditions.

6 See Barnett, B.C., Galvis, S. and Gouraige, G., ‘On Third World Debt’, (1984) 22 Harvard Journal of International Law 83, at 88–90.Google Scholar

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8 See W.R. Cline, International Debt Re-examined (1995), 426–7. Bonded loans were the primary private source of sovereign debt until the Great Crash of 1929.

9 See Buckley, R.P., ‘The Transformative Potential of a Secondary Market: Emerging Markets Debt Trading from 1983 to 1989’, (1998) 21 Fordham International Law Journal 1152.Google Scholar

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12 Before the Argentine Great Default (2001) many bond issues governed by New York law did not contain CACs. This picture precluded restructuring of the debt combined with modification of the crucial terms of the loan. To favour orderly debt workouts and minimize vulture funds’ activism, CACs were acknowledged worldwide. See M. Megliani, Sovereign Debt: Genesis, Restructuring, Litigation (2015), 354–60.

13 The decision of the Court is grounded on the following arguments: drawing resources from the IMF is a sovereign activity as only states can become members of the IMF and use its resources, the use of resources is aimed at preserving the stability of the international monetary system under a regulatory scheme providing for the exchange of currencies, the terms and conditions under which resources are drawn are encapsulated in the IMF Articles of Agreement and not in a contractual instrument, and the mechanism for drawing resources is specific to the IMF and is not available on the markets. EM Ltd et al. v. Republic of Argentina, 473 F.3d 463, 482–485 (2nd Cir. 2007).

14 In particular, the Swiss Bundesgericht rejected the argument that the transfer of the sums to the BIS could qualify as abusive behaviour by Argentina, holding that BIS immunity, as ensured by its Headquarters Agreement, could not be the object of an appraisal by the municipal judge, Bundesgericht, order of 30 July 2010, NML Capital et EM Limited c. Banque des règlements internationaux (para. 4.4). The point here is that international organizations enjoy a wider margin of immunity as compared to sovereign states. Devos, D., ‘Special Immunities: Bank for International Settlements’, in Lastra, R.M. and Buchheit, L.C. (eds.), Sovereign Debt Management (2014), 127 at 128–30.Google Scholar

15 NML Capital Ltd v. Spacefort Systems International and the Republic of Argentina, 788 F. Supp. 2d 1111, 1124 (2011). By contrast, the Court of Appeals for the Second Circuit found that the absence of profit motive in the purchase of scientific equipment in the United States did not make the funds held in New York for this purpose unattachable as that activity was commercial in nature, NML Capital Ltd v. The Republic of Argentina 680 F.3d 254, 258–260 (2nd Cir. 2012).

16 NML Capital Ltd v. The Republic of Argentina (judgment of 11 October 2012), available at www.itlos.org/fileadmin/itlos/documents/cases/case_no.20/C20-Request_annexes_A-K.pdf.

17 The Ara Libertad Case, Argentina v Ghana para 97, available at www.itlos.org/fileadmin/itlos/documents/cases/case_no.20/published/C20_Order_201112.pdf. See Kraska, J., ‘The Ara Libertad (Argentina v. Ghana)’, (2013) 107 American Journal of International Law 404CrossRefGoogle Scholar.

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19 Société NML Capital Ltd v. La République Argentine (Cour de cassation, decisions No 394, 395, 396 of 28 March 2013), available at www.courdecassation.fr/jurisprudence_2/premiere_chambre_civile_568/394_28_25871.html. See El Sawah, S. and Vinuales, J.E., ‘L'immunité d'exécution dans l'affaire de l'Ara Libertad devant le TIDM’, (2013) 140 Journal de Droit International 867, at 883–5Google Scholar.

20 Vriesde v. The State of the Netherlands and the National Bank for Developing Countries, (1987) 17 Netherland Yearbook of International Law 307–9; the Dutch government opposed the request to issue a garnishee order and was victorious in all the degrees of the judgment.

21 Philipp Brothers v. Republic of Sierra Leone [1995] 1 Lloyd's Rep. 289 (CA).

22 Third ACP-EEC Convention of Lomé (Lomé III), (1985) 24 International Legal Materials 571.

23 ‘The arrangements were made between sovereign entities, and were plainly not intended either to give rise to private rights or to create any enforceable trust;’ accordingly, ‘[h]aving received the money under the international provisions of the Lomé Convention without recourse to English law, the State has an encumbered title to it’. Philipp Brothers v. Sierra Leone, supra note 21, at 292 (quoting Lord Leggat).

24 Sandri v. Repubblica Argentina, judgment of 24 March 2005, (2005-I) Foro italiano, 1582.

25 Debt relief to poor countries is given under the HIPC Initiative and the Multilateral Debt Relief Initiative (MDRI). The HIPC Initiative was launched in 1996 by the World bank and the IMF, with the aim of providing a debt reduction programme in favour of the eligible IDA-only countries. It was subsequently ameliorated in 1999 through the HIPC Enhanced Initiative, designed to lower the level of the economic targets to achieve and to connect debt reduction to poverty relief more effectively. See ‘IMF, Debt Relief Under the Heavily Indebted Poor Countries (HIPC) Initiative’ available at www.imf.org/external/np/exr/facts/hipc.htm. The MDRI involves the cancellation of 100 per cent of the claims held by three multilateral institutions – the IMF, the International Development Association, and the African Development Fund – against debts owed by countries that have granted relief under the HIPC Initiative. See IMF, ‘The Multilateral Debt Relief Initiative’, available at www.imf.org/external/np/exr/facts/mdri.htm.

26 It has been estimated that for HIPCs the potential cost of lawsuits constituted 18 per cent of their annual health and education spending, 59 per cent of debt service and 5 per cent of budget revenue. In 2008, the World Bank and IMF estimated that the potential impact of court awards ranged from less than 0.5 per cent of the debtor country's GDP to 49 per cent in the case of Liberia. See Report of the independent expert on the effects of foreign debt and other related international financial obligations of states on the full enjoyment of all human rights, particularly economic, social, and cultural rights, UN Doc. A/HRC/23/37 (2013), para. 50.

27 See Report of the independent expert on the effects of foreign debt and other related international financial obligations of states on the full enjoyment of all human rights, particularly economic, social, and cultural rights, UN Doc. A/HRC/14/21 (2010), paras. 15–16.

28 Donegal International v. Zambia [2007] EWCH 197 (Comm Ct), [2007] 1 Lloyd's Rep. 397.

29 UN Doc. A/HRC/14/21, supra note 27, para. 25.

30 See Waibel, M., ‘Elusive Certainty’, (2007-July) 26 International Financial Law Review 32.Google Scholar

31 Donegal International v. Zambia, supra note 28, [2007] 1 Lloyd's Rep., at 481. See Laryea, T., ‘Donegal v. Zambia and the Persistent Debt Problems of Low-Income Countries’, (2010) 73 Law and Contemporary Problems 193, at 195.Google Scholar

32 Ergoinvest DD. v Democratic Republic of Congo and Société Nationale d'Elétricité, 355 F. Supp. 2d 9 (SDNY).

33 UN Doc. A/HRC/33/54, supra note 3, para. 17.

34 Themis Capital LLC and Des Moines Investment Ltd v. Democratic Republic of Congo and Central Bank of the Democratic Republic of Congo, 35 F. Supp. 3d 457, 493 (SDNY 2014).

35 UN Doc. A/HRC/33/54, supra note 3, para. 64.

36 Report of the Independent Expert on the effects of foreign debt and other related international financial obligations of States on the full enjoyment of all rights, particularly economic, social, and cultural rights, UN Doc. A/HRC/20/23 (2011), para. 6.

37 UN Doc. A/HRC/20/23, supra note 36, para. 3. See also Černič, J.L., ‘Sovereign Financing and corporate Responsibility for Economic and Social Rights’, in Bohoslavsky, J.P. and Černič, J.L. (eds.), Making Sovereign Financing and Human Rights Work (2014), 139 at 144–5Google Scholar.

38 IMF, Assessing Sustainability (2002), 4.

39 See The Joint World Bank-IMF Debt Sustainability Analysis for Low-Income Countries, at www.imf.org/en/About/Factsheets/Sheets/2016/08/01/16/39/Debt-Sustainability-Framework-for-Low-Income-Countries.

40 Supra note 25.

41 See L. Guder, The Administration of Debt Relief under the International Financial Institutions (2009), 44–5.

42 In the view of Jeffrey Sachs, the HIPC debt sustainability analysis should take into account the Millennium Developments Goals: J. Sachs, Resolving the Debt Crisis of the Low Development Countries (2002).

43 Cf. Riegner, M., ‘Legal Frameworks and General Principles for Indicators in Sovereign Debt Restructurings’, (2016) 41 Yale Journal of International Law Online 141, at 170–1Google Scholar. Cf. Section 5.2, infra.

44 Report of the independent expert on the effects of foreign debt and other related international financial obligations of states on the full enjoyment of all human rights, particularly economic, social, and cultural rights, UN Doc. A/71/305 (2016), para. 84.

45 The proposed French bill was modeled on Art. 1699 of the French Civil Code which forbids champertous litigation. See Wautelet, P., ‘Les Fonds Vautours’, in Audit, M. (ed.), Insolvabilite´ des Etats et Dettes Souveraines (2011), 99 at 120–1Google Scholar.

46 See Wautelet, supra note 45, at 124–5.

47 See D. Sookun, Stop Vulture Funds Lawsuits (2010), 90–1.

48 The Act, originally intended to remain in force for one year, was adopted after a public consultation strongly backed by the Jubilee Campaign. See Wautelet, supra note 45, at 124. The UK initiative induced two holdouts on Liberia to accept the terms on offer from the IDA managed Debt Reduction Facility; cf. IMF and IDA, Heavily Indebted Poor Countries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI)—Status of Implementation and Proposals for the Future of the HIPC Initiative (2011).

49 See Waibel, M., ‘Debt relief to Poor Countries: Rules v Discretion’, (2010) 25 Butterworths Journal of International Banking and Financial Law 295Google Scholar.

50 See Section 6.2, infra.

51 See Bismuth, R., ‘L’émergence d'un “ordre public de la dette souveraine” pour et par le contrat d'emprunt souverain? Quelques réflexions inspirées par une actualité très mouvementée’, (2012) 58 Annuaire Français deDroit International 489, at 502CrossRefGoogle Scholar.

52 External debt sustainability and development, Resolution adopted by the General Assembly on 20 December 2010, UN Doc. A/RES/65/144 (2011), para. 3.

53 Available at unctad.org/en/PublicationsLibrary/gdsddf2012misc1_en.pdf. The Principles constitute the outcome of the UNCTAD Project on Promoting Responsible Sovereign Lending and Borrowing.

54 See the comment sub Principle 7.

55 Abuse may be qualified either as a guiding principle or as a general principle of law. See von Bogdandy, A. and Goldman, M., ‘Sovereign Debt Restructurings as Exercises of International Public Authority’, in Esposito, C., Li, Y. and Bohoslavky, J.P. (eds.), Sovereign financing and international law (2013), 39 at 68Google Scholar.

56 See Brummer, C., ‘Why Soft Law Dominates International Finance – and not Trade?’, (2011) 13 Journal of International Economic Law 623CrossRefGoogle Scholar.

57 See Bohoslavsky, J.P. and Esposito, C., ‘Principles Matter: The Legal Status of the Principles on Responsible Sovereign Financing’, in Esposito, C. et al., supra note 55, 73 at 86Google Scholar.

58 The Principles have been derived by analogy from domestic legal systems. Only a few reflect customary law (corruption, necessity), while the rest of them may be classified as general principles of law (agency, authorization, bindingness), emerging principles (assessment of borrower's capacity, lender's due diligence), guiding principles (audits, disclosure of information), or structural principles (avoiding overborrowing). See M. Goldmann, Responsible sovereign lending and borrowing: the view from domestic jurisdictions (2012), 8.

59 Cf. Bohoslavsky, J.P. and Goldmann, M., ‘An Incremental Approach to Sovereign Debt Restructuring: Sovereign debt Sustainability as a Principle of Public International Law’, (2016) 41 Yale Journal of International Law Online 13, at 38–40Google Scholar.

60 UNCTAD, Sovereign Debt Workouts: Going Forward. Roadmap and Guide (2015), at unctad.org/en/PublicationsLibrary/gdsddf2015misc1_en.pdf.

61 Emerging principles express more a trend that a settled conviction and are likely to be acknowledged in the international ad domestic jurisdictions, but still lack acceptance, Goldmann, supra note 58, at 8.

62 UNCTAD Roadmap, supra note 60, at 24.

63 This defence would be a sort of sanction for the lack of participation in restructuring processes. UNCTAD Roadmap, supra note 60, at 59–60.

64 The Guiding Principles are annexed to the Report of the Independent Expert on the effects of foreign debt and other related international financial obligations of States on the full enjoyment of all rights, particularly economic, social, and cultural rights, UN Doc. A/HRC/20/23 (2011), and endorsed by Human Rights Council Resolution, UN Doc. A/HRC/RES/20/10 (2012).

65 UN Millennium Declaration adopted by the UN General Assembly through Resolution UN Doc. A/RES/55/2 (2000). With particular reference to development and poverty eradication, the Declaration stresses the commitment to making the right to development a reality for everyone and to freeing the entire human race from want.

66 UN Doc. A/RES/69/L.84 (2015). These basic principles constitute the outcome of the (more) ambitious project carried out by the Ad Hoc Committee on Sovereign Debt Restructuring to create a sovereign debt restructuring mechanism. The project was supported by Bolivia and other developing countries with the aim of avoiding the problems originated on the trail of the vulture funds litigation before New York courts.

67 The point is that ‘the cut-and-dried lawyer's justice of the municipal court’ can be hardly overcome, cf. J.M. Keynes, ‘The Revision of the Treaty’, in The Collected Writings of John Maynard Keynes (1971), 6–7.

68 See Witthaker, S.J., ‘Introductory’, in Chitty on Contracts, vol. 1 (2012), 3 at 28–31Google Scholar. However, the rule of debt continuity in the event of succession of government may bend in the case of ‘odious debts’, i.e., debts incurred without the consent of the population and against its benefit. See O. Lienau, Rethinking Sovereign Debt (2014). For an overview of the odious debt doctrine see J. King, The Doctrine of Odious Debt in International Law (2016).

69 See G. Watrin, Essai de Construction d'un Contentieux de Dettes Publiques (1929), 210.

70 ‘Its first duty was to itself. Its own preservation was paramount. Its revenues were properly devoted to that end. The appeal of the company for funds came to an empty treasury, or to one only adequate to the demands of the war budget.’ French Company of Venezuelan Railroads Case, (1902) X RIAA 285, 353.

71 The Permanent Court of Arbitration incorporated in its decision the position expressed by the Russian government, under which ‘l'obligation pour un Etat d'exécuter les traités peut fléchir “si l'existence même de l'Etat vient a‘être en danger, si l'observation du devoir international est . . . self destructive”’, (‘the obligation for a State to execute treaties may be weakened if “the very existence of the State is endangered, if observation of the international duty is itself . . . self-destructive”’) Affaire de l'indemnite´ russe, (1912) XI RIAA, 421, 443.

72 See Watrin, supra note 69, at 36.

73 Société commerciale de Belgique, (1939) PCIJ Series C No 87, at 204–22, 236.

74 See J. Crawford, The International Law Commission's Article on State Responsibility (2002), 181.

75 See Sloane, R.D., ‘On the Use and Abuse of Necessity in the Law of State Responsibility’, (2012) 106 American Journal of International Law 447, at 464CrossRefGoogle Scholar.

76 See Crawford, supra note 74, at 178–86.

77 In this latter case it is questionable that a state that has contributed to a certain situation is not entitled to invoke necessity when it is necessary to safeguard its population. See Salmon, J., ‘Faut-il Codifier l'Etat de Nécessitè en Droit International’, in Makarczyk, J. (ed.), Essay in Honour of Manfred Lachs (1984), 243 at 270Google Scholar.

78 See Heathcote, S., ‘Circumstances Precluding Wrongfulness in the ILC Articles on State Responsibility’, in Crawford, J., Pellet, A. and Olleson, S. (eds.), The Law of International Responsibility (2010), 491 at 496Google Scholar.

79 The claims brought against Argentina before the ICSID tribunals gave uncertain responses on the meaning of ‘sole means’. In CMS Gas Transmission Company v. The Republic of Argentina, the ICSID tribunal, admitting that there were more economic recipes to cope with the crisis, found that the defence could not be raised in the presence of viable alternatives ‘even if they may be more costly or less convenient’, CMS Gas Transmission Company v. The Republic of Argentina, Award, Case No. ARB/01/8, 12 May 2005, para. 324, available at www.italaw.com/sites/default/files/case-documents/ita0184.pdf. By contrast, in LG&E Energy Corp et al. v. Argentine Republic, the ICSID tribunal held that ‘[a]lthough there may have been a number of ways to draft the economic recovery plan, the evidence before the tribunal demonstrates that an across-the-board response was necessary’, LG&E Energy Corp et al. v. Argentine Republic, Decision on liability, Case No. ARB/02/1, 3 October 2006, para. 257, available at www.italaw.com/sites/default/files/case-documents/ita0462.pdf. In Enron Corporation Ponderosa Assets L.P. v. Argentine Republic, the ICSID tribunal distanced itself from LG&E Energy to reconcile itself with CMS Gas, holding that ‘[a] rather sad world comparative experience in the handling of economic crises shows that there are always many approaches to address and correct such critical events, and it is difficult to justify that none of them was available in the Argentine case’, Enron Corporation Ponderosa Assets L.P. v. Argentine Republic, Award, Case No. ARB/01/3, 22 May 2007, para. 308, available at www.italaw.com/sites/default/files/case-documents/ita0293.pdf. www.italaw.com/sites/default/files/case-documents/ita0299.pdf.

80 This suspension may be useful in the face of a liquidity crisis, but insufficient in relation to an overall economic crisis, see Waibel, M., ‘Two World of Necessity in ICSID Arbitrations: CMS and LG&E’, 10 (2007) Leiden Journal of International Law 637, at 641–2Google Scholar.

81 Budesverfassungsgerichthof, Judgment BvM 1–5/03, 1, 2/06 of 8 May 2007, available at www.bundesverfassungsgericht.de/SharedDocs/Entscheidungen/EN/2007/05/ms20070508_2bvm000103en.html. The majority of the Court, adhering to a report submitted by Professor Reinisch, found that the lack of state practice did not tip the scales in favour of the existence of a customary norm in this regard and, in arguendo, underscored that the plea of necessity before the ICSID tribunals concerned wrongfulness under international law (Bilateral Investment Treaties) and not under a private law contractual relationship (investment agreements). In contrast, Judge Lubbe-Wolff, in her dissenting opinion, argued in favour of the applicability of necessity in this context, emphasizing that it was not only a customary law but also general principle of law as such applicable in a dispute between a state and foreign nationals.

82 Not all the BITS explicitly include governmental bonds among the investment: Art. 1(c) of the Bilateral Investment Treaty between Italy and Argentina enumerates bonds in the definition of investment, so does the Argentina-Germany BIT but not the Argentina-US BIT. See Waibel, M., ‘Opening Pandora's Box: Sovereign Bonds in International Arbitration’, (2007) 101 American Journal of International Law 711, at 729Google Scholar. Moreover, certain BITs (e.g., US-Peru Free Trade Agreement) and certain multilateral treaties, like the CETA (EU-Canada Comprehensive Economic Agreement) and the TPPA (Trans Pacific Partnership Agreement) contain clauses under which, if a public debt forms object of a ‘negotiated restructuring’, investors cannot bring claims based on fair and equitable treatment and expropriation (Annex 8-B CETA and 9-G TTPA). See Nakajima, K., ‘An Elusive Safeguard with Loopholes: Sovereign Debt and its “negotiated restructuring” in International Investment Agreements in the Age of Global Financial Crisis’, (2016) 3 International Review of Law 1, at 14–18Google Scholar.

83 See Art. XI of the Bilateral Investment Treaties between Argentina and the United States (signed 14 November 1991), (1992) 31 International Legal Materials 124.

84 ‘If the concept of essential security interests were to be limited to immediate political and national security concerns, particularly of an international character, and were to exclude other interests, for example major economic emergencies, it could well result in an unbalanced understanding of Article XI [of the BIT]’, CMS Gas v. The Republic of Argentina, supra note 79, at para. 359.

85 Cf. Sykes, A.O., ‘Economic “Necessity” in International Law’, (2015) 109 American Journal of International Law 296, at 312CrossRefGoogle Scholar.

86 LG&E Energy Corp et al. v. Argentine Republic, supra note 79, para. 228. However, the clause cannot be self-judging; otherwise, ‘the Treaty would be deprived of any substantive meaning’, Sempra Energy International v. Argentine Republic, Award, Case No. ARB/02/16, 28 September 2007, para. 374, available at www.italaw.com/sites/default/files/case-documents/ita0770.pdf.

87 Public policy may be understood as the ‘whole body of laws and legal instruments whose principles cannot be set at naught either by special conventions or by a conflicting foreign law’, Separate opinion of judge Moreno Quintana in the case for the Application of the Convention of 1902 Governing the Guardianship of Infants (Netherlands v. Sweden), [1958] ICJ Rep. 105. However, public policy remains a ‘conception the definition of which in any particular country is largely dependent on the opinion prevailing at any given time in such country itself’, Case Concerning the Payment of Various Serbian Loans Issued in France, [1929] PCIJ Series A No 20, at 46.

88 Vervaeke v. Smith, [1983] 1 AC 145, 164 (quoting Lord Simon).

89 ‘The courts are not free to enforce a foreign right at the pleasure of the judges, to suit the individual notion of expediency or fairness. They do not close their doors unless help would violate some fundamental principle of justice, some prevalent conception of good moral, some deep-rooted tradition of common weal’. Loucks v. Standard Oil Co., 224 NY 99, 111 (1918).

90 See Collins (gen. ed.), Dicey, Morris and Collins on the Conflict of Laws, vol. 2 (2012), 1874.

91 Regulation (EU) No 1215/2012 of the European Council and the Parliament of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, [2012] OJ L 351/1.

92 [1956] Ch. 323, 334 (quoting Upjohn J).

93 [1976] AC 249, 278 (quoting Lord Cross).

94 [2002] UKHL 19, 382 (quoting Brooke LJ).

95 See Dolinger, J., ‘World Public Policy: Real International Public Policy in the Conflict of Laws’, (1982) 17 Texas Journal of International Law 167Google Scholar, and Forteau, M., ‘L'Ordre Public “Transnational” ou “Réellement International”’, (2011) 138 Journal de Droit International 3Google Scholar.

96 Dolinger, supra note 95, at 172. See also H. Rolin, ‘Vers un ordre réellement international’, in Hommage d'une génération de juristes au président Basdevant (1960), 441 at 444.

97 See J.-B. Racine, L'Arbitrage Commercial et l'Ordre Public (1999), 353–431. The truly international public order was explicitly mentioned in two arbitral awards: ICC Case 1110 (1963) para. 20 and World Duty Free Company v. the Republic of Kenya, ICSID Case ARB/00/7 (award of 4 October 2006), paras. 138–57.

98 This duty reflects both the right of the population to a certain standard of living and the obligation of the state to ensure this standard. Cf. Arts. 2 and 11 of the International Covenant on Economic, Social and Cultural Rights, supra note 1.

99 See Villaroman, N.G., ‘Debt Servicing and its Adverse Impact on Economic, Social, and Cultural Rights in Developing Countries’, (2010) 9 Journal of Human Rights 487, at 493–4CrossRefGoogle Scholar.

100 A court must recognize every foreign judgment it enforces but must not necessarily enforce every foreign judgment it recognizes. See Collins, supra note 90, at 664.

101 See Hartley, T.C., ‘Mandatory Rules in international Contracts: the Common Law Approach’, (1997) 266 Recueil des Cours 337, at 350–3Google Scholar, and Harris, J.H., ‘Mandatory Rules and Public Policy under Rome I Regulation’, in Ferrari, F. and Leible, S. (eds.), Rome I Regulation (2009), 269 at 297–8Google Scholar.

102 Cf. Art. 9(1), Regulation (EC) 593/2008 of the European Parliament and the Council of 7 June 2008 on the law applicable to contractual obligations (Rome I), [2008] OJ L 177/6. This notion reflects the judgment rendered by the European Court of Justice in Arblade under which ‘[t]he fact that national law rules are categorized as public order legislation does not mean that they are exempt from compliance with the provisions of the Treaty . . . . The considerations underlying such national legislation can be taken into account by Community law only in terms of the exceptions to Community freedoms expressly provided for by the Treaty and, where appropriate, on the ground that they constitute overriding reasons relating to public interest’, Arblade and Leloup, Judgment of the Court of 23 November 1999, joined cases C-369/96 and C-376/96, [1999] ECR I-8498, para. 31.

103 See A. Bonomi, ‘Article 9’, in U. Magnus and P. Mankowski (eds.), European Commentaries on Private International Law, Vol. II: Rome I Regulation (2017), 599 at 616.

104 Cf. Berendes, A.J., ‘Why Overriding Mandatory Provisions that Protect Financial Stability Deserve Special Treatment’, (2014) 61 Netherlands International Law Review 69, at 94–5CrossRefGoogle Scholar. This point is well reflected by the Greek Bondholder Act 2012 (Law 4050/2012) which introduced retroactively CACs in bonds issued under Greek law, underscoring that this provision was of the highest public interest and amounted to an overriding mandatory provision (Art. 1(10)).

105 See A. Chong, ‘The Public Policy and Mandatory Rules of Third Countries In International Contracts’, (2006) 2 Journal of Private International Law 27, at 40–7.

106 See D.D. Prentice, ‘Illegality and Public policy’, in Chitty on Contracts, supra note 68, 1223, at 1227.

107 King v. Michael Faraday & Partners, [1939] 2 All ER 478.

108 See Section 5.1, supra.

109 The internal public policy is mainly focused on the contracting parties by providing them with a right of protection (‘public policy of protection’) or on the general interests of society by giving a direction upon the acts of individuals (‘public policy of direction’). See B. Fauvarque-Cosson, D. Mazeaud (eds.), European Contract Law (2008) 101, at 143.

110 Although the circumstance that a state is a party does not involve the submission of the transaction to its law (Case Concerning the Payment of Various Serbian Loans Issued in France, supra note 87, at 42), this fact does not exclude the possibility to apply the overriding mandatory rules of that state.