ICSID Case No. ARB/07/5
In this arbitration the tribunal decided, by a majority, that it had jurisdiction to hear 'mass claims' brought by over 60,000 Italian bondholders. The decision suggests that an unjustifiable refusal by a state to honour its sovereign debt is likely to breach the terms of bilateral investment treaties (BITs) and allow investors to pursue international arbitration claims, potentially before ICSID, the arbitration arm of the World Bank. Furthermore, if this decision is followed in the future, individual bondholders will be able to come together to bring a mass claim.
In 2001 Argentina defaulted on its debt and suspended payment on its sovereign bonds. In 2005 it launched a voluntary exchange offer pursuant to which existing bonds would be exchanged for new bonds on revised terms. Shortly afterwards Argentina also passed a law which unilaterally modified its payment obligations under the bonds.
The claimant bondholders, who initially numbered 180,000, declined to participate in the exchange offer and, in 2006, filed the Request for Arbitration with ICSID. In 2010 Argentina launched a second exchange offer on modified terms. Many claimants accepted the 2010 exchange offer, leading to their withdrawal from the proceedings and a reduction in the number of claimants to 60,000.
Argentina's objections to jurisdiction focused on two key issues: (a) whether mass claims were compatible with the ICSID framework and (b) whether the bonds constituted an investment under the ICSID Convention. The majority decision provoked an excoriating dissent from the respondent's party appointed-arbitrator.
This is the first time that an ICSID tribunal has considered the issue of mass claims. The decision has confirmed the broad scope of ICSID jurisdiction and paves the way for claimants to bring further such actions. However, it will be some time before the method by which these claims will be determined is defined and it remains to be seen whether they can be successfully disposed of on a collective basis.
The decision is also noteworthy for its approach to the definition of investment. The majority's refusal to apply the Salini criteria represents a comprehensive dismissal of their determinative value and seems indicative of their desire to recognise that investments of a purely financial nature may well fall firmly within ICSID's jurisdiction.
A BIT is an agreement between two countries in which they give reciprocal undertakings regarding the promotion and protection of private investments made by individuals and companies in each other's territories. BITs frequently provide for dispute resolution by means of international arbitration, often before ICSID.
Argentina claimed that its consent to arbitration, as expressed in the Italy-Argentina BIT, did not extend to disputes taking the form of mass proceedings. In addition, it noted that the ICSID Convention was silent on the question of collective proceedings and thus contended that collective arbitration was beyond the jurisdiction of an ICSID tribunal, as well as inadmissible under ICSID's procedural framework.
The majority – Professor Pierre Tercier and Professor Albert Jan van den Berg – dispatched these objections. They took the view that if a tribunal had jurisdiction over the claims of several claimants, there was no logical reason why the tribunal should lose such jurisdiction when the number of claimants passed a certain threshold. The majority further observed that to treat the silence of the ICSID Convention as a prohibition on collective proceedings would be contrary to the purpose of the BIT and the ethos of ICSID.
The majority began by considering the test established by the tribunal in Salini Costruttori S.p.A. and Italstrade S.p.A. v. Morocco, which specifies a number of criteria for assessing whether there is an "investment". Only claims relating to an investment may be arbitrated before ICSID. Although useful to describe what characteristics investments may or should have, they found that the criteria should not operate so as to frustrate the intention of the parties or the spirit of the ICSID Convention. Instead, the majority found that the only requirement was that the putative investment led to the creation of the value protected under the Treaty which, in this case, was the right to claim reimbursement from Argentina of the principal and interest on the bonds.
In the event that the bonds were found to be investments, Argentina objected that they were not made within its territory as required by the Treaty. Only the lump sum payments made by the underwriters to Argentina could be considered made in the territory, it argued, whilst payments for purchases of security entitlements in the secondary market could not.
The majority were of the view that in the case of investments of a purely financial nature the relevant criteria could not be the same as those applying to an investment consisting of business operations or involving manpower or property. For the former, the appropriate criteria should not be where the funds were paid out or transferred, but where and/or for the benefit of whom the funds were ultimately used. The bonds therefore constituted an investment in Argentina.
Professor Georges Abi-Saab saw the mass claims as an issue both of jurisdiction and admissibility. He considered that the silence of the ICSID Convention should be resolved in favour of the respondent because representative proceedings could not have been foreseen by the drafters of the Convention, nor was there any basis to assume that they would have included them had they foreseen them.
Furthermore, Abi-Saab contended that the sheer number of claims made it unreasonable to compare the present proceedings to multi-party arbitration. Whilst a tribunal might reasonably deal individually with small number of separate parties, it would be unable adequately to analyse the claims of such a vast number of claimants.
Abi-Saab was opposed to the majority's broad interpretation of the term investment. He judged that the term had a core that could not be waived, even by agreement between the parties to a BIT, with the consequence that purely financial investments were a priori excluded.
Abi-Saab was also dissatisfied with the majority's position regarding where the investment was made, arguing that the flows of funds in the secondary market bore no visible relation to the lump sum received by Argentina from the underwriters at issuance.
This ePublication is for general guidance only and does not constitute definitive advice.