ICSID tribunal takes jurisdiction over 60,000 bondholder claims against Argentina for sovereign debt default

In its decision of 4 August 2011, a majority tribunal took a monumental decision to accept a "mass claim" under the ICSID rules in relation to Argentina's debt default in 2002. Such was the controversy of the decision in Abaclat and Others v Argentina that it has led to a challenge to two of the arbitrators, Pierre Tercier (President) and Albert Jan van den Berg and the proceedings are currently suspended.

Background facts

In December 2001, following the financial crisis that has spawned so many investment treaty claims, Argentina defaulted on its sovereign debt, suspending payment of government bonds. While Argentina set about restructuring its debt, Task Force Argentina, an association of eight Italian banks, was set up to "represent the interests of the Italian bondholders in pursuing a negotiated settlement with Argentina".

Argentina submitted various proposals to TFA in the years that followed, including a 2005 offer of new debt exchange terms. When the bondholders, represented by TFA, refused to accept this offer, TFA set out a written mandate as a way of obtaining the bondholders’ consent to pursue ICSID proceedings on their behalf, taking "any action necessary to conduct the arbitration and/or settle the dispute, without direct consultation with Claimants, who are deprived of the right to give instructions…". This was accepted by approximately 180,000 bondholders.

In 2007, they brought a claim that the terms of the exchange offer and the restructuring breached the fair and equitable treatment standard in the BIT as well as the obligations not to adopt discriminatory measures, to provide national treatment to investors and not to expropriate without requisite compensation. Roughly two-thirds of bondholders, including Beccara, have since accepted a further exchange offer and therefore withdrawn their claims. Together, the remaining claims total more than US$1 billion.

The parties' positions

TFA's principal argument was that the mass aspect of the claim was merely procedural and, therefore, not a bar to establishing jurisdiction. It fell within the arbitrators' powers to rule on procedure under article 44 of the ICSID Convention, which reads: "If any question of procedure arises which is not covered by this Section or the Arbitration Rules or any rules agreed by the parties, the Tribunal shall decide the question."

Argentina resisted jurisdiction on multiple grounds, arguing that:

• each investment gave rise to a separate claim which should be made by separate claimants rather than through TFA as agent; 
• neither the BIT nor the ICSID Convention provides for collective claims and, as such, they are contrary to the ICSID system and not covered by the consent to arbitrate. Article 44 applies only to matters over which the tribunal already had jurisdiction; 
• the bondholders' consent to arbitrate was obtained by fraud and through violation of the good faith principle and, in any case, was vitiated by TFA's conflict of interests (ie. protecting the banks from liability as well as succeeding in the arbitration); 
• the bonds did not qualify as an investment within the categories set out in the Salini case; 
• the claims were contractual rather than treaty claims based on sovereign acts of Argentina; 
• the bondholders were not investors and had "only a remote and attenuated relationship to the underlying bonds". Nor did they have Italian nationality to enable them to make use of the BIT; and 
• the BIT's dispute resolution clause (Article 8 ) provides for amicable consultation and court jurisdiction as prerequisites to international arbitration. These were not pursued.

Approach of the majority

Tercier and van den Berg dismissed each of Argentina's objections, save for issues that may pertain to individual claimants, which it reserved for the merits phase.

To determine whether it was appropriate to accept the claims, the tribunal took a twofold approach: whether the ICSID tribunal had the competence to entertain the claims (ie, jurisdiction), focusing on the issue of consent; and whether the claims were fit to be determined at all, by any body, given the unusual collective circumstances (ie, admissibility).

Jurisdiction

The two arbitrators considered whether TFA's mandate package was capable of constituting a valid consent by the bondholders to arbitrate. The BIT did not mention collective proceedings and the ICSID Convention's only requirement was that consent should be in writing. Accordingly, they deemed it unnecessary to read in any additional consent requirements by virtue of the multiplicity of claimants.

As regards Argentina's consent, the state accepted that, in entering into the BIT, it had consented "in principle to ICISD arbitration with regard to a dispute falling within the scope of the BIT". However, it argued that such a mass claim in the context of sovereign debt restructuring fell outside the scope of ICSID arbitration. The tribunal determined that the subject of the dispute was irrelevant and the multiplicity of claimants was merely a "procedural modality". It noted that if Argentina had wished to exclude mass claims from its consent under the BIT, it could have done so by way of notification to ICSID (under article 25(4) of the convention).

Aside from the mass claims points, the other key issue of jurisdiction related to whether bonds could be investments for the purpose of the BIT. In his dissent, Abi-Saab argues that bonds do not relate to a specific economic enterprise in the host state so there is no territorial link with Argentina. In his view, in a bond issuance process only the underwriting banks could claim contribution to the territory, not the secondary market. However, the majority were of the view that "the reality of the bond issuance process" was that different transactions were "part of one and the same economic operation" and, as such, there was a qualifying investment.

Admissibility

The majority tribunal considered that, in theory at least, the framework of ICSID proceedings could be adapted to accommodate the mass claim while maintaining Argentina's right to properly defend its claim. It was up to the tribunal to make any orders necessary for the management of the proceedings, using the power in article 44 to fill in gaps in the Convention. In any event, the alternative – dealing separately with each claim – was deemed impossible.

Various practical aspects of how to manage this mass claim were considered, which could serve as useful guidance for future proceedings with a similar level of complexity:

• although the bondholders have been individually identified (unlike in a US class action), they will be managed and represented by TFA; 
• evidence will be examined in a simplified way, possibly using a "sampling procedure to make distinctions among groups of claimants" and consider "sufficiently homogenous" claims together; and 
• the merits phase will be split into two. First, a general phase will determine core issues and the best method of examining them. This will be followed by a second phase to put the chosen mechanism of examination in place and to proceed with it.

Effectively, the tribunal dealt with the proceedings as a hybrid of 'representative proceedings' where a single action is brought on behalf of a group of unnamed claimants (as in US class actions), and 'aggregate proceedings', where identified claimants bring consolidated claims. As such it was able to refer to principles applicable to both.

Comment

On numerous occasions in the history of BIT arbitrations, tribunals faced with novel claims asserted by creative claimants have refused to read into treaties limiting conditions that were not inserted by the treaty drafters. As a result they have allowed certain controversial claims to proceed, such as those based upon most favoured nation provisions, using an umbrella clause to circumvent contractually agreed dispute resolution venues or allowing claims by companies owned by individuals who were nationals of the host state. Now allowing claims to be brought by 60,000 claimants at the same time can be added to that list. On many occasions the ground-breaking decisions have been made by split tribunals, and this is no exception.

Fashioning a mass claim procedure within the existing ICSID legal framework will be a challenge. When the "issues touching specifically upon each individual claimant" are addressed at the merits stage, this could be a 'due process' minefield. Also, some caution must be expressed when a tribunal attempts to fill gaps in procedure. This must be limited to dealing with specific problems and resisting any temptation to "complete or improve the ICSID framework in general". Further challenges are inevitable.

Abaclat and Others (formerly Giovanna a Beccara and Others) ICSID Case No. ARB/07/S

A version of this Herbert Smith briefing has also been published by Global Arbitration Review.