Breaking the Bond: Vulture Funds and Investment Arbitration

The recent decision on jurisdiction and admissibility in Abaclat and others v. Argentina has brought to the public’s attention the issue of sovereign defaults and restructuring. Whilst in the Abaclat case, claimants were mostly individual retirees who then assembled to file a class action, a more frightening protagonist is made up of “vulture” funds. These are hedge funds, or other financial vehicles, which purchase sovereign (or corporate) bonds on secondary markets when their prices are extremely low due to the debtor’s repudiation or inability to pay back. They then litigate before national courts or international arbitral tribunals in order to recover the entire sums accrued. The analysis in this article begins with an overview of the process of sovereign debt restructuring. We then explore the case of a vulture fund which does not participate in a debt restructuring, and proceeds to enforce an award condemning a State to pay on its bonds, outside of the ICSID framework. Art. V(2) of the New York Convention offers two potential grounds to the State: non-arbitrability and public policy. We examine the interpretations given to the two notions in several cases most relevant to our research. Arguably, the interests involved in debt restructuring proceedings do appear to be sufficient to preclude arbitrability of the subject matter, and thus the enforcement of the award may be prevented. Secondly, the permeability of the public policy exception to economic considerations of fundamental importance – such as those involved in sovereign debt restructuring – finds supporting evidence in a host of jurisdictions. The two grounds might thus be used by States to “break the bond” and prevent non-participating vulture funds from obtaining an unfair advantage over the rest of the creditors. The recent decision on jurisdiction and admissibility in Abaclat and others v. Argentina has brought to the public’s attention the issue of sovereign defaults and restructuring. Whilst in the Abaclat case, claimants were mostly individual retirees who then assembled to file a class action, a more frightening protagonist is made up of “vulture” funds. These are hedge funds, or other financial vehicles, which purchase sovereign (or corporate) bonds on secondary markets when their prices are extremely low due to the debtor’s repudiation or inability to pay back. They then litigate before national courts or international arbitral tribunals in order to recover the entire sums accrued. The analysis in this article begins with an overview of the process of sovereign debt restructuring. We then explore the case of a vulture fund which does not participate in a debt restructuring, and proceeds to enforce an award condemning a State to pay on its bonds, outside of the ICSID framework. Art. V(2) of the New York Convention offers two potential grounds to the State: non-arbitrability and public policy. We examine the interpretations given to the two notions in several cases most relevant to our research. Arguably, the interests involved in debt restructuring proceedings do appear to be sufficient to preclude arbitrability of the subject matter, and thus the enforcement of the award may be prevented. Secondly, the permeability of the public policy exception to economic considerations of fundamental importance – such as those involved in sovereign debt restructuring – finds supporting evidence in a host of jurisdictions. The two grounds might thus be used by States to “break the bond” and prevent non-participating vulture funds from obtaining an unfair advantage over the rest of the creditors.