Breaking the Bond: Vulture Funds and Investment Arbitration

by Dimitri Euler
and Giuseppe Bianco

The recent decision on jurisdiction and admissibility in Abaclat and others v Argentina [i] has brought to the arbitration community’s attention the issue of sovereign defaults and restructurings. Several legal scholars have speculated about the potential consequences of its evolution.[ii] Moreover, the French government recently has filed an amicus brief in the proceedings NML v Argentina in New York.[iii]

This blog focuses on vulture funds, which are at the centre of international investment law. The blog also focuses on the potential defences available to the host state. In this regard, the blog elaborates on public policy in the context of International Centre for Settlement of Investment Disputes (“ICSID”) and non-ICSID proceedings. Lastly, the blog addresses the different procedural means of a host state in response to the claim of an investor.


The alteration of ICSID’sprocedural rules in Abaclat and others v Argentina opened a “Pandora’s Box” [iv] with regard to sovereign bonds in the framework of investment arbitration. In Abaclat, claimants were mostly individual retirees who then assembled a class action.  Their case is similar to how vulture funds attempt or may attempt to enforce their rights in the area of investor-state disputes. Vulture funds are a type of hedge fund or private equity. It is used to 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 the bonds. This is because the debt is considered very weak or in imminent default. Vulture funds follow a speculative pattern known as the prisoner’s dilemma.[v] Vulture funds speculate on the likelihood of other bondholders restructuring a sovereign state. If other bondholders agree to a restructuring plan, the sovereign state regains its liquidity. Therefore, the vulture funds hold the original bond of the sovereign state that recaptured its liquidity, whereas the other bondholders then merely hold a new title of less value.  Vulture funds are litigated before national courts or international arbitral tribunals in order to recover the entire sum accrued. They are a more frightening opponent for states than class actions such as in the Abaclat case.

There is one principle, known as the principle of restructuring proceedings, that demands that all creditors are to be treated equally. Therefore, to prevent the violation of the other creditors’ rights, several jurisdictions limit the parties’ right to arbitrate in the case of bankruptcy or debt restructuring of a disputing party.

Nevertheless, limitations to the arbitrability of the dispute are unnecessary if the award falls into the bankruptcy estate, in which case an arbitral award is enforced together with other liabilities. Consequently, a national court dealing with the enforcement of liabilities against a bankrupt or restructured respondent will reduce the amount of the award relative to the total amount of debts. However, depending on the place of enforcement, arbitral awards may be enforced directly. Under the ICSID Convention, a state has an international obligation to recognise an award and waives its rights to review the award. In this regard, an ICSID contracting state is required to enforce an ICSID award whereas it may refuse enforcement of other awards and foreign verdicts. Under these circumstances, the host state will have no means to defend itself against the vulture fund and its conduct at the stage and place of enforcement.

The court at the place of enforcement may refuse recognition due to public policy violations or other reasons per the New York Convention. Assuming that an international principle of creditors’ equality exists and that it is considered to be international public policy under the law at the place of enforcement, the host state might nevertheless have a means to “break the bond” and prevent non-participating vulture funds from obtaining an unfair advantage over the rest of the creditors.

A host state may raise its claim against the host state in an alternative forum than a treaty-based arbitral tribunal. There is only very limited room for the counterclaims of a host state in the same treaty-based forum where the investors first raised its claim.[vi] Additionally, recalling the Lauder cases, the doctrines of res judicata and lis pendens can lack force as a general principle of international law.[vii] Thus, an investor may face difficulties if it attempts to invoke res judicata or lis pendens defences against a host state. This leaves room for a host state to file claims in a different favourable forum. For example, under the domestic law at the place of enforcement, a host state may have capacity to file a counterclaim.

Additionally, the New York Convention and other regimes of enforcement honour public policy defences in recognition and enforcement proceedings. For example, in Chromalloy Aeroservices v Egypt,[viii] the United States courts showed that the New York Convention has the potential to extend beyond classical recognition and enforcement defences. The courts in the secondary jurisdiction allow claimants to reinstate awards based on public policy that were set-aside in the primary jurisdiction.

Arguably, the interests involved in debt restructuring proceedings appear to be sufficient to preclude an arbitral proceeding based on non-arbitrability of the subject matter and, thus, to be able to refuse recognition of an international arbitral award. Secondly, the high threshold of the public policy exception to economic considerations is of fundamental importance – such as those involved in sovereign debt restructuring – and it finds supporting evidence in a host state. 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. Arbitral tribunals need to be cautious when accepting jurisdiction, so as to not violate the rights of equal creditors by establishing only for some, a treaty-based dispute resolution forum; whereas others are excluded due to their nationality. If the same issued bond is treated differently depending on the nationality of the parties, the rights are not given an equal footing.

This topic is discussed in “Breaking the Bond: Vulture Funds and Investment Arbitration“ in ASA Bulletin 3/2013.

[i] See Abaclat et al v Argentina Republic, Decision on Jurisdiction and Admissibility Abaclat and Others (Case formerly known as Giovanna a Beccara and Others) v Argentine Republic, ICSID Case No ARB/07/5, Decision on Jurisdiction and Admissibility, 4 August 2011.

[ii] See e. g. H. van Houtte and B. McAsey, ‘Abaclat and others v Argentine Republic: ICSID, the BIT and Mass Claims’ [2012] 27.2 ICSID Review 231; J.B. Chrostin, ‘Sovereign Debt Restructuring and Mass Claims Arbitration before the ICSID, The Abaclat Case’ [2012] 53 Harv. Int’l LJ  505; A. M. Steingruber, “Abaclat and Others v Argentine Republic: Consent in Large-scale Arbitration Proceedings’ [2012] 27.2 ICSID Review 237

[iii] I. Couet, ‘La France apporte son soutien à l’Argentine contre les fonds vautours’ (Les Echoes, 27 July 2013) <> Accessed 5 September 2013

[iv] See M. Waibel, ‘Opening Pandora’s Box: Sovereign Bonds in International Arbitration’ [2007] 101 AJIL 711

[v] See ‘Prisoner’s Dilemma’ <’s_dilemma> Accessed 5 September 2013

[vi] Spyridon Roussalis v. Romania, Award Spyridon Roussalis v Romania, ICSID Case No ARB/06/1 (Greece-Romania BIT), Award, 2 December 2011.

[vii] Lauder v Czech Republic, Final Award Ronald S Lauder v Czech Republic, UNCITRAL, Final Award, 3 September 2001; CME v Czech Republic, Svea Court of Appeal Svea Court of Appeal Judgement, Case no T 8735-01; CME Czech Republic v Czech Republic, Partial Award CME Czech Republic BV v Czech Republic, UNCITRAL, Partial Award, 13 September 2001; CME v Czech Republic, Final Award CME Czech Republic BV v Czech Republic, UNCITRAL, Final Award, 14 March 2003.

[viii] Chromalloy Aeroservices, a Division of Chromalloy Gas Turbine Corporation, Petitioner, and The Arab Republic of Egypt, Respondent; Civil No. 94-2339 (JLG), United States District Court for the District of Columbia, 939 F. Supp. 907; 1996 U.S. Dist. LEXIS 13736.

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