I. Arbitration as an incentive not to participate in the Greek recovery

The agreement reached between the Eurogroup and the Greek government in the night between last February 20th and 21st has been considered by the former as ‘a comprehensive blueprint for putting the public finances and the economy of Greece on a sustainable footing and hence for safeguarding financial stability in Greece and in the Euro area as a whole’.¹Eurogroup statement, 21 February 2012

Unfortunately, the recent Abaclat award (2011), that affirmed the jurisdiction of an ad hoc panel of the World Bank’s arbitration arm the International Centre for the Settlement of Investment Disputes (“ICSID”) over a claim filed by over 160,000 Italian bondholders against Argentina for breach of the Italy-Argentina Bilateral Investment Treaty (“BIT”),²The Abaclat v. Argentina Case (ICSID Case No. ARB/07/05) is the ‘first ICSID case that involves a sovereign debt bond (or a security entitlement therein), totally unrelated to a specific project or economic operation or enterprise in the borrowing State’ (Abaclat v. Argentina ICSID Case, Georges Abi-Saad’s dissenting opinion, para. 39). might represent an obstacle toward the achievement of the goals of the Greek restructuring. The effect of Abaclat amounted to a declaration that the effective protection of the investment represents the sole term of reference of investment arbitration, independently from the legitimate interest of the state, and that this effectively permitted re-interpretation (if not simply overrode) Argentinian law, the relevant BIT, the terms and conditions of the bonds in question, and even (with respect to “mass claims”) the procedural rules of ICSID itself.

Although the substantive decision is still pending, and Argentina could obtain a favorable judgment on the basis of the several exceptions that it has raised against its opponents’ claims, the possibility of an Abaclat 2.0 case concerning Greek bonds appears likely.

There are at least three arguments supporting this conclusion:

1. arbitration to obtain the full repayment of the due debt, or equivalent damages for breach, certainly represents for bondholders a better solution than traditional judicial procedures in local courts;
2. bondholders could be attracted by a possible replication of the pro-investor attitude manifested by the majority in the Abaclat judgment;
3. financial mediators that sold the bonds to their clients could find it convenient to replicate the experience of the Task Force Argentina and finance the entire proceeding in order to protect themselves from possible national judicial claims.

It should be of no surprise, therefore, if some German holders of Greek bonds were to decide not to subscribe to the proposed exchange agreement but rather to opt for participating in a collective arbitration, maybe entirely financed by a third-party (vulture) fund³On vulture funds See Muir-Watt H., Private International Law as Global Governance: Beyond the Schism, from Closet to Planet, Sciences-po Law School, PILAGG blog, available at http://blogs.sciences-po.fr/pilagg/files/2011/11/PILAGG-Launching-Paper-HMW1.pdf or by one of the German institutions that in June 2011 were holding more than EUR 14bn in Greek bonds or debt and that likely sold them to their clients.⁴Barclays Greece’s top 40 bondholders analysis, July 2011 Germany is, in fact, one of thirty-eight countries that have concluded a BIT with Greece, along with China, Russia, Poland, Romania, Slovakia and Slovenia and others. All the treaties contain an ad hoc arbitral provision,⁵Cf. Article articles 11 (2) of the 1960 Germany-Greece BIT; Article 9 of the China-Greece BIT; Article 8 of the Greece-Russian Federation BIT, which also provides a six-months chill-out period. and almost all contain a wide and blurred definition of investments that the application of the Abaclat parameters would certainly consider extending to bonds and bond-related securities.⁶For example, Article 1.c) of the Poland-Greece BIT defines investments as ‘every kind of asset, and in particular, but not exclusively: loans, claims to money or to any other performance under contract having financial value’, article 3 (1) (c) of the Germany-Greece BIT disposes that ‘the term investment every kind of asset, and in particular, but not exclusively: claims to money and any any other performance having a financial value’, which is the basic formula contained also in the BIT with Russia, China, Hungary, Czech Republic, Romania.

II. A second (negative) impact of arbitration: discrimination among EU citizens

There is also a second aspect concerning the possibility of a future arbitration over the Greek bonds that must be considered: that is the risks that it poses to the European legal system. Ten Member States have concluded a Bilateral Investment Agreement with Greece⁷Czech Republic, Estonia, Germany, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia. and their citizens who hold a bond, but not the citizens of the other seventeen countries, could decide, instead of accepting a 53% haircut of their investment or commencing a lawsuit before a national court, to denounce the violation of their investment by the Greek restructuring plan, and to start proceedings before of an ad hoc arbitral tribunal.

The existing divergence between the European legal system and the intra-EU BITs, mainly based on the possibility of triggering ad hoc arbitrations provided by the bilateral treaties, not only hides an explosive potential for the future of the Greek restructuring plan, but also grounds the possibility of discriminatory practices between citizens of different Member States. This problematic tension, already underlined in 2006 by the Economic and Financial Committee, that defined the current legal duality full of ‘uncertainties’ and invited them to review the need for such BITs and to inform the Commission on the actions taken in this context, undoubtedly risks being exacerbated due to the Greek restructuring plan. Notwithstanding that, intra-EU BITs have been considered fully valid in the 2004 Eastern Sugar B.V. (Netherlands) v The Czech Republic judgment of the Stockholm Chamber of Commerce,⁸SCC No. 088/2004, par. 142 ss. which represents the only publicly-known arbitral award on the subject matter. Further the majority of Member States are keen to maintain the intra-EU BITs, and in particular their specific provisions related to ‘expropriation, compensation, protection of investments and investor-to-state dispute settlement’.⁹(Council of the EU of 8 January 2008, no. 5123/98, 2007 EFC Report to the Commission and the Council of the Movement of Capital and Freedom of Payments, para. 15) If some European bondholders decided to trigger the arbitral clause contained in the BIT concluded by their country of origin, other European bondholders could claim to be discriminated against, and add further legal struggles to the existing ones.¹⁰See Potest? M., 2009, Bilateral Investment Treaties and the European Union. Recent Developments in Arbitration and Before the ECJ, Koninklijke Brill NV, Leiden

III. Thoughts on alternative scenarios

Due to the double negative effects that admitting an arbitral scrutiny over the Greek default might generate, both in creating a global incentive not to participate in the debt restructuring and in producing discriminatory situations among EU citizens, the adoption of some ex ante or ex post measures capable of eliminating these distorting effects seems necessary. The European Commission could certainly start an infringement proceeding against all the Members bound by an intra-EU Bit for not having abrogated a piece of legislation which discriminate among European citizens and clearly contrast with the principles and values of the European Treaty and Article 14 of the European Convention of Human Rights. Both the European Commission and the European Court of Justice have already intervened in order to remove incompatibilities between the BITs concluded by candidate or Member States with non-Member States,¹¹In 2002 the European Commission assisted acceding and candidate States in the process of adapting BITs entered into with the United States, in order to remove incompatibilities with the obligations which those States would have undertaken by joining the EU. On the other side, in 2009 the ECJ handed down two judgments concerning the incompatibility of several BITs entered into between Austria, Sweden and third countries (Case C-205/06, Commission v. Austria; Case C-249/06, Commission v. Sweden; See also Potest? M., Op. Cit., pp. 238-241). and there are good juridical and political reasons to do the same with the intra-EU treaties.

As an ex post measure, arbitrators and national judges should recognize the superiority of certain fundamental rights of the Greek people, namely to health, education, decent standards of life, food and housing, etc., over the economic rights affirmed on the basis of any Bilateral Investment Treaty. Accepting the existence of a hierarchy of international norms, as already done by the European Court of Human Rights,¹²See the very recent Case of Hirsi Jamaa and Others v. Italy, where the ECHR states that: “States’ responsibility continues even after their having entered into treaty commitments subsequent to the entry into force of the Convention or its Protocols in respect of these States”. Cfr. Slivenko v. Latvia, No. 48321/99, para. 104-109. The Court held that ‘the Court’s function is to review, from the point of view of the Convention, the reasoning in the decision of the domestic courts’ and to control whether there requirements of the Convention are met by ‘the combined application of the treaty provisions and domestic law in the applicants’ case’. See also Hirsi Jamaa and Others v. Italy, ECHR no. 27765/09, 23 february 2012. Cfr. Prince Hans-Adam II of Liechtenstein v. Germany GC, no. 42527/98, ? 47, ECHR 2001-VIII, and Al-Saadoon and Mufdhi v. the United Kingdom, no. 61498/08, ? 128, 2 March 2010. the Inter-American Court of Human Rights¹³In the Indigenous Community Swhoya maxa v. Paraguay, Series C No. 146, at ?140, the IACHR stated that ”the enforcement of bilateral commercial treaties negates vindication of non-compliance with state obligations under the American Convention; on the contrary, their enforcement should always be compatible with the American Convention, which is a multilateral treaty on human rights that stand in a class of its own and that generates rights for individual human beings and does not depend entirely on reciprocity among States’. and the International Court of Justice,¹⁴Armed Activities on the Territory of the Congo (New Application: 2002) ( Dem. Rep. Congo v. Rwanda) , Jurisdiction and Admissibility 2006 ICJ Rep 1, at paras 64 and 125. courts would recognize the subordination of bilateral investment treaties to the respect of fundamental human rights contained in the fundamental charters, and will help international law to move beyond the current fragmentation of self-contained regimes of international law.¹⁵Report of the Study Group of the International Law Commission, Fragmentation of International Law: Difficulties Arising from the Diversification and Expansion of International Law, UN Document A/CN.4/L.702, 18 July 2006. See also Simma B., 2006, Of Planets and the Universe: Self-Contained Regimes of International Law, The European Journal of International Law Vol. 17 no.3 At the same time, investment arbitration would finally come out of the closet¹⁶See Muir Watt H., op. Cit. and consolidate its public nature¹⁷See. Gibson C.S., 2009, Arbitration, Civilization and Public Policy: Seeking Counterpoise between Arbitral Autonomy and the Public Policy Defense in View of Foreign Mandatory Public Law, PENN STATE LAW REVIEW [Vol. 113:4, according to whom, when dealing with investment arbitration, the: ‘public-private distinction tends to rely on rudimentary dissimilarities that preclude more nuanced appreciation of the true nature of either aspect, let alone their overlap, cross-referencing, and blurring at the margins’. Cfr. Mills A., Antinomies of Public and Private at the Foundations of International Investment Law and Arbitration,Journal of International Economic Law 14(2), 469–503. that derives from the peculiarity of states as providers and guarantors of the common good, and will have no choice but to preserve it. Peremptory norms will have to be recognized as such, and therefore not subordinated to incompatible provisions that arise from a bilateral treaty, nor to the satisfaction of economic claims based on the voluntary acceptance of a risk.¹⁸The possibility to trigger a BIT provision for the non-repayment of a financial investment, which is per se based on a certain level of risk acceptance, would not only violate fundamental rights, but also international law. In his article, Michael Waible (op cit.) refers to this second problem by quoting the Maffezini and CSM cases where the panels affirmed that: “Bilateral Investment Treaties are not insurance policies against bad business judgments.” (Maffezini v. Kingdom of Spain, ICSID Case No. ARB/97/7, Award, para 64. (Nov. 13, 2000); CMS Gas Transmission Co. v. Argentine Repubic, ICSID Case No. Arb/01/8, Objections to Jurisdiction, para. 29 (July 17, 2003). Similarly, in Starrett Housing, the Iran-U.S. Claims Tribunal affirmed that “investors in Iran, like investors in all other countries, have to assume a risk that the country might experience strikes, lockouts, disturbances, changes of the economic and political system and even revolution” (Starrett Housing Corp. v. Islamic Republic of Iran, 4 Iran-U.S. Cl. Trib. Rep. 122, 156 (1983 III).

Finally, where an arbitral proceeding is triggered and an award eventually rendered in favor of the bondholders, EU national courts will have the last possibility to avoid the internal discrimination and to affirm the existence of an untouchable bloc of fundamental rights as international and national public order. By denying enforcement, judges will participate in the definition of a new relationship between the world of Main Street and the world of Wall Street, and abrogate the discriminations that the intra-EU BITs determine.

IV. Conclusion

In conclusion, investment arbitration in the post-Abaclat era does represent an attractive incentive for some holders of Greek bonds and consequently a risk for the good outcome of the Greek recovery efforts, which could worsen the already dramatic condition faced by the Greek population and the Eurozone. At the same time, an arbitration claim against the Greek exchange plan could offer arbitrators an opportunity to bring arbitration back to its roots, impede its definitive liftoff,¹⁹See Wai R., 2002, Transnational Liftoff and Juridical Touchdown: The Regulatory Function of Private International Law in an Era of Globalization, Columbia Journal of Transnational Law, Vol. 40, pp. 209-274 and make a qualitative leap to the definitive recognition of its public nature. Any legislative or judiciary action finalized to abandon the way opened by the majority in the Abaclat judgment, in conclusion, will not only avoid discrimination among European citizens and increase the likelihood of a higher level of participation to the Greek exchange offer, but, above all, will contribute to swinging back the pendulum oscillating between investors and States, so that in the future the Abaclat award will be remembered as the extreme point that has been left behind.

Tomaso Ferrando is a PhD Candidate at Sciences Po Law School, Paris.

• 1
  Eurogroup statement, 21 February 2012
• 2
  The Abaclat v. Argentina Case (ICSID Case No. ARB/07/05) is the ‘first ICSID case that involves a sovereign debt bond (or a security entitlement therein), totally unrelated to a specific project or economic operation or enterprise in the borrowing State’ (Abaclat v. Argentina ICSID Case, Georges Abi-Saad’s dissenting opinion, para. 39).
• 3
  On vulture funds See Muir-Watt H., Private International Law as Global Governance: Beyond the Schism, from Closet to Planet, Sciences-po Law School, PILAGG blog, available at http://blogs.sciences-po.fr/pilagg/files/2011/11/PILAGG-Launching-Paper-HMW1.pdf
• 4
  Barclays Greece’s top 40 bondholders analysis, July 2011
• 5
  Cf. Article articles 11 (2) of the 1960 Germany-Greece BIT; Article 9 of the China-Greece BIT; Article 8 of the Greece-Russian Federation BIT, which also provides a six-months chill-out period.
• 6
  For example, Article 1.c) of the Poland-Greece BIT defines investments as ‘every kind of asset, and in particular, but not exclusively: loans, claims to money or to any other performance under contract having financial value’, article 3 (1) (c) of the Germany-Greece BIT disposes that ‘the term investment every kind of asset, and in particular, but not exclusively: claims to money and any any other performance having a financial value’, which is the basic formula contained also in the BIT with Russia, China, Hungary, Czech Republic, Romania.
• 7
  Czech Republic, Estonia, Germany, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia.
• 8
  SCC No. 088/2004, par. 142 ss.
• 9
  (Council of the EU of 8 January 2008, no. 5123/98, 2007 EFC Report to the Commission and the Council of the Movement of Capital and Freedom of Payments, para. 15)
• 10
  See Potest? M., 2009, Bilateral Investment Treaties and the European Union. Recent Developments in Arbitration and Before the ECJ, Koninklijke Brill NV, Leiden
• 11
  In 2002 the European Commission assisted acceding and candidate States in the process of adapting BITs entered into with the United States, in order to remove incompatibilities with the obligations which those States would have undertaken by joining the EU. On the other side, in 2009 the ECJ handed down two judgments concerning the incompatibility of several BITs entered into between Austria, Sweden and third countries (Case C-205/06, Commission v. Austria; Case C-249/06, Commission v. Sweden; See also Potest? M., Op. Cit., pp. 238-241).
• 12
  See the very recent Case of Hirsi Jamaa and Others v. Italy, where the ECHR states that: “States’ responsibility continues even after their having entered into treaty commitments subsequent to the entry into force of the Convention or its Protocols in respect of these States”. Cfr. Slivenko v. Latvia, No. 48321/99, para. 104-109. The Court held that ‘the Court’s function is to review, from the point of view of the Convention, the reasoning in the decision of the domestic courts’ and to control whether there requirements of the Convention are met by ‘the combined application of the treaty provisions and domestic law in the applicants’ case’. See also Hirsi Jamaa and Others v. Italy, ECHR no. 27765/09, 23 february 2012. Cfr. Prince Hans-Adam II of Liechtenstein v. Germany GC, no. 42527/98, ? 47, ECHR 2001-VIII, and Al-Saadoon and Mufdhi v. the United Kingdom, no. 61498/08, ? 128, 2 March 2010.
• 13
  In the Indigenous Community Swhoya maxa v. Paraguay, Series C No. 146, at ?140, the IACHR stated that ”the enforcement of bilateral commercial treaties negates vindication of non-compliance with state obligations under the American Convention; on the contrary, their enforcement should always be compatible with the American Convention, which is a multilateral treaty on human rights that stand in a class of its own and that generates rights for individual human beings and does not depend entirely on reciprocity among States’.
• 14
  Armed Activities on the Territory of the Congo (New Application: 2002) ( Dem. Rep. Congo v. Rwanda) , Jurisdiction and Admissibility 2006 ICJ Rep 1, at paras 64 and 125.
• 15
  Report of the Study Group of the International Law Commission, Fragmentation of International Law: Difficulties Arising from the Diversification and Expansion of International Law, UN Document A/CN.4/L.702, 18 July 2006. See also Simma B., 2006, Of Planets and the Universe: Self-Contained Regimes of International Law, The European Journal of International Law Vol. 17 no.3
• 16
  See Muir Watt H., op. Cit.
• 17
  See. Gibson C.S., 2009, Arbitration, Civilization and Public Policy: Seeking Counterpoise between Arbitral Autonomy and the Public Policy Defense in View of Foreign Mandatory Public Law, PENN STATE LAW REVIEW [Vol. 113:4, according to whom, when dealing with investment arbitration, the: ‘public-private distinction tends to rely on rudimentary dissimilarities that preclude more nuanced appreciation of the true nature of either aspect, let alone their overlap, cross-referencing, and blurring at the margins’. Cfr. Mills A., Antinomies of Public and Private at the Foundations of International Investment Law and Arbitration,Journal of International Economic Law 14(2), 469–503.
• 18
  The possibility to trigger a BIT provision for the non-repayment of a financial investment, which is per se based on a certain level of risk acceptance, would not only violate fundamental rights, but also international law. In his article, Michael Waible (op cit.) refers to this second problem by quoting the Maffezini and CSM cases where the panels affirmed that: “Bilateral Investment Treaties are not insurance policies against bad business judgments.” (Maffezini v. Kingdom of Spain, ICSID Case No. ARB/97/7, Award, para 64. (Nov. 13, 2000); CMS Gas Transmission Co. v. Argentine Repubic, ICSID Case No. Arb/01/8, Objections to Jurisdiction, para. 29 (July 17, 2003). Similarly, in Starrett Housing, the Iran-U.S. Claims Tribunal affirmed that “investors in Iran, like investors in all other countries, have to assume a risk that the country might experience strikes, lockouts, disturbances, changes of the economic and political system and even revolution” (Starrett Housing Corp. v. Islamic Republic of Iran, 4 Iran-U.S. Cl. Trib. Rep. 122, 156 (1983 III).
• 19
  See Wai R., 2002, Transnational Liftoff and Juridical Touchdown: The Regulatory Function of Private International Law in an Era of Globalization, Columbia Journal of Transnational Law, Vol. 40, pp. 209-274