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EMTA Special Seminar: Arbitration in the Emerging Markets (London) - Jan. 29

Friday, January 29, 2016

Hosted by
Dechert LLP
160 Queen Victoria Street
London EC4V 4QQ

This EMTA Special Seminar will provide analysis and commentary by a panel of legal experts on the differing contexts in which arbitration arises in the Emerging Markets. 

Specific topics will include: 

9:00 a.m. Registration and Breakfast 

9:30 a.m. – 11:30 a.m. Panel Discussion
Alexander de Gramont (Dechert) - Moderator
Guled Yusuf (Allen & Overy)
Henry Weisburg (Shearman & Sterling)
Peter Griffin (Slaney Advisors)

Additional support provided by Allen & Overy and Shearman & Sterling.

This Special Seminar is part of a continuing series of panels and presentations that EMTA is pleased to sponsor on various topics of interest to Emerging Markets investors and other market participants, and is part of EMTA’s Legal & Compliance Seminars*.

*CLE credit will be available for NY attorneys.  This seminar is non-transitional and appropriate for experienced attorneys only.  Please click here for details on EMTA’s Financial Hardship Policy.

Registration fee for EMTA Members US$95 / US$695 for non-members. 

Online registration is now closed. If you wish to register, please contact Aviva Werner (  

Arbitration in the Emerging Markets Panel in London

Following its NYC panel in October, EMTA presented on January 29, 2016 at the London offices of Dechert a panel of legal experts on the differing contexts in which arbitration arises in the Emerging Markets. Alexandre de Gramont (Dechert) moderated the panel, with the following panelists: Guled Yusuf (Allen & Overy), Henry Weisburg (Shearman & Sterling) and Peter Griffin (Slaney Advisors). The event was supported by Allen & Overy, Dechert and Sherman & Sterling. Relevant documents relating to the topic, including Messrs. de Gramont, Yusuf and Weisburg’s PowerPoint presentations, can be accessed by Clicking Here.

De Gramont provided a high level introduction to international commercial and investor-state arbitration. He explained that the primary purpose of international arbitration is to promote commerce among nations, which will lead to prosperity and inter-dependency, by providing for a neutral forum for the resolution of international business disputes. Such commercial arbitration arose in its modern form in the wake of WWI (and even before in the UK), and was viewed as an instrument of peace and a creature of consent, almost always arising from a pre-existing contract. The rise of this form of arbitration is evidenced by the currently over 120 international arbitration institutions around the world, 70% of them having been created in the past 30 years. The advantages of arbitration over litigation are speed, cost, party autonomy and specialized expertise. Recognition and enforcement of an arbitral award (where court judgments are not always enforceable abroad) was another advantage, as was the ability to choose the language, choice of law and other procedural matters. Despite these advantages, there was some historical skepticism among banks and financial institutions against international arbitration because of the concern that arbitrators decide cases based on the equities, there was a lack of appellate review and collateral security and high interest rates made arbitration seem unnecessary. Based on a 2013 survey, almost 25% of financial sector transactions chose arbitration as the first choice for dispute resolution. Its particular rise in the financial services sector was the result of numerous factors, including the financial crisis of 2008, recession in major economies, increasingly complex cross-border transactions, increased regulation in the financial sector, increased investment in developing countries and unpredictability/bias/extreme delays in local courts. De Gramont also listed the recent developments in this area, which included specialized arbitration rules for banking and finance disputes, the 2013 ISDA Arbitration Guide (with model arbitration clauses) and the creation of specialized arbitral institutions for financial disputes.

While the line is increasingly blurred, international commercial arbitration generally is between private parties (including state-owned enterprises), and arises from a contract between the parties, and investor-state arbitration is generally between an investor and the State (although state-owned enterprises are often involved), and arises from an investment treaty or local investment law (but also from contract).

De Gramont then turned to an investor-state arbitration overview. The old rule was that one could not sue States because of sovereign immunity (as the King could not be sued by his subjects). However, under the new regime, private persons or entities can bring arbitration against States for a variety of claims if the State has consented through a treaty, contract or domestic statute. These instruments provide an advance waiver of sovereign immunity. He pointed to the massive growth in the last 15-20 years, with over 3200 investment treaties and over 600 known cases, which are typically high-value, alleging hundreds of millions and even billions of dollars (like the Yukos award). Typical fora for investor-state arbitration include the International Centre for Settlement of Investment Disputes (“ICSID”), ad hoc arbitration under the United Nations Commission on International Trade Law (UNCITRAL Rules), the International Court of Arbitration of the International Chamber of Commerce (“ICC”) and the Arbitration Institute of the Stockholm Chamber of Commerce (“SCC”). He also noted that many investors structure their investments through holding companies incorporated in States that have investment treaties with the host State – allowing them to bring investment treaty arbitration. Some characterize this practice as “treaty” shopping, while others consider it prudent investment planning (much as one would do for tax purposes).

Yusuf presented his summary on investment arbitration and sovereign debt disputes. With the 2001 $155 billion Argentine debt default (now surpassed by Greece in 2012) and the recent purchase of sovereign debt, arbitration became a new tool for hold-outs to maximize the value of their investments. He discussed ICSID arbitration (as just one of particular forums, but the most common where the vast majority of disputes are settled), with its recognition and record of enforceability and limited grounds for annulment (with States volunteering to pay their arbitration awards (Argentina being the obvious exception)), as ICSID is part of the World Bank (who can put pressure on the States), with a public and high-profile bargaining chip of threatening a reduction in States’ funding and/or its reputation (thus providing bondholders with an opportunity to negotiate better outcomes). All ICSID cases are listed on its website, providing greater global transparency. He explained that the key question is jurisdiction and how cases are typically brought under a treaty, and whether “investments” are deemed “qualifying” under the “double keyhole approach”, namely under the ICSID Convention and the relevant Bilateral Investment Treaty (“BIT”), is not always crystal clear. For example, tribunals ruled in favor of bondholders in the Argentine case (Abaclat v. Argentina (2011)), and in favor of Greece in another case (Poštová Banka v. Greece (2015)). While States are becoming more specific in their treaties that bonds are qualifying investments, the States also seek to limit protections in those same treaties. Now, especially after the Argentine case, some States are excluding bonds as qualifying investments from their treaties.

Yusuf noted that there are currently over 3000 international investment agreements in force. Typically, an investment treaty will provide qualifying investors and investments with a range of substantive protections, such as national treatment, expropriation and fair and equitable treatment (relating to good faith and due process). However, is enforcement a pyrrhic victory? In the US proceedings NML Capital v. Argentina, while the defendant tried to move its assets, the plaintiffs sought to enforce a decision against various State assets, which demonstrated the challenges and difficulties inherent in seeking to enforce a decision against a recalcitrant State. He also mentioned Article 53 of the ICSID Convention relating to awards being binding, Article 54 on recognition and enforcement and Article 55 relating to immunity.

He also briefly discussed the practical enforcement alternatives of a secondary market for awards; diplomatic protection and use of the awards for potential settlements (Dow v. Kuwait); and the increase in the amount of insurers that are subrogated and assume enforcement by providing insurance for the failure of States to honor their awards.

Weisburg provided a summary of US law on foreign sovereign immunity. He explained that it was a judicial doctrine, an international principle derived from the sovereign equality of States, whose application is a question of national law. Courts recognize arbitration and courts can turn an arbitration award into cash. One must look at the laws of a particular country to determine how sovereign immunity is applied (for example, in the US there are many cases involving arbitration, including at the Supreme Court level). There are two doctrines of sovereign immunity – “absolute” (which is the historic approach) where a sovereign has absolute immunity, absent a clear waiver, and “restrictive” (which is codified in the US in the Foreign Sovereign Immunities Act (“FSIA”)) where a distinction is made between sovereign and commercial acts. Unless there’s an exception under the FSIA, immunity relates to immunity from lawsuits, attachments, arrests and executions. An important limitation is that, if property is used for commercial activity and the activity is the basis for the claim, immunity only extends to pre-judgment attachment. A sovereign is also not responsible for punitive damages and there are serious limitations on discovery (although, as he noted, the NML case has made some headway chipping away at this). Diplomatic, military and central bank property enjoy special protections. In describing what a “foreign state” is, the FSIA describes it as the foreign state itself, its “political subdivision” or its “agency or instrumentality” (which is a “separate legal person” and an “organ of a foreign state or political subdivision thereof”). He highlighted the Cuba “Bancec” case, which demonstrated the “alter ego” rule, under which distinctions between different foreign state entities could be disregarded in limited circumstances.
The single most important exception to sovereign immunity is a waiver by the foreign state “either explicitly or by implication”. Another exception, litigated in the Weltover case, relates to actions “based upon a commercial activity carried on in the United States by the foreign state” where the nature of the conduct, rather than reference to its purpose, is determinative. Other key exceptions to immunity are arbitration relating to actions brought to enforce an agreement or confirm an award (although a tricky question may be who decides whether parties have agreed to arbitration) and actions to enforce ICSID awards (although those have still proven difficult to enforce).

Griffin remarked that there is a shift in Emerging Markets arbitration cases, where deference is given to the corporate veil and it is difficult to find commercial activities of a sovereign that are not carried out by subsidiaries. He then turned to mega awards (eg, Yukos’ $50 billion claim against the Russian Federation, where the Russian national debt is $143 billion, and Strategic Infrasol Foodstuff’s $85 billion claim against India, where the national debt is $823 billion) as examples of how arbitration awards can create sovereign indebtedness. In addition to these arbitrations which relate to bilateral or multilateral investment treaties and can be brought by individuals or companies, arbitrations can also be brought through contract provisions (eg, Dow v. Kuwait) and can give rise to multi-billion dollar awards. With no input from the IMF or the London or Paris Clubs, one or more arbitrators “with the stroke of a pen” can render an award that is tantamount to the creation of sovereign debt. The unexpected explosion of claims against sovereigns based on investment treaties (there are currently over 3,000) can have many implications.

Once “created” by the issuance of an international arbital award, there is very little that anyone can do since there is no appeal, there are very limited grounds – based essentially on a breach of process – to challenge either the decision itself or the damages awarded and there is almost a philosophical acknowledgement that the system would collapse on itself if it allowed appeals, even if an arbitral award was a bad one (because that would lead to chaos and abuse). And, once “created”, an arbitral award can be enforced globally, where it is far quicker and easier to enforce and convert into a judgment than, for example, a New York or London judgment (although arbitral awards have similar collection challenges). The grounds for resisting recognition are very limited and are similar to the grounds for seeking to annul the award.

Griffin then proceeded to enumerate some of the difficult issues that arise in the arbitration context from the EM creditor perspective:
  • How can EM investors properly assess the debt profile of a sovereign if it can be altered, often very significantly, by an arbitration award?
  • What happens, in a debt restructuring scenario, when there are “renegade” arbitration award creditors who are not part of the traditional restructuring process?
  • Are there sufficient disclosure mechanisms in place to give EM bond investors the information that they need about ongoing international arbitrations?
  • What happens if an arbitration award causes a sovereign to breach its bond covenants? Are the rating agencies aware of this possibility?
  • Should there be an alerting mechanism to the IMF and other institutions that an arbitral award exists against a sovereign?
  • Looked at from the other perspective, should arbitrators have some background or expertise in EM sovereign debt, given that they are empowered to create it?
  • Who guards the guards? Is there sufficient confidence in arbitrators to get it right since they are typically arbitration specialists, not debt specialists, and they tend to rely heavily on evidence from financial/damages experts?
  • In the EM bond universe, the litigating hold-out creditor (such as Elliott or Aurelius) is an exception. In the arbitration enforcement universe, the litigating creditor is the norm, which has the following important practical effects: Litigating award creditors typically deal primarily with the Ministry of Justice or the Attorney General of a country, whereas EM bond creditors typically deal with the Ministry or Finance; both the substance and the tone of the dialogue can be very different; and the Elliott case has shown very vividly how a litigating creditor can disrupt debt restructurings between a sovereign and its creditors. In his estimation, “there should be little doubt that the major arbitral award creditors will utilize similar techniques in the future”.
Griffin then turned to the secondary market for arbitration awards, stemming from the potential lucrative returns. Although there are recalcitrant sovereigns, they tend to pay more often than not in the arbitration context. And, for those that do not, there are very powerful enforcement tools available. While there is no official market for international arbitration claims, there are, however, a variety of ways in which one can invest:

  • Through a “traditional” assignment or participating interest: There are a variety of brokers in the market that source exotic instruments, including claims and arbitration awards. There are also companies that will sell claims or awards directly to third party purchasers. Claims and awards can also be acquired from administrators and bankruptcy trustees and the like. However, one must be cognizant of limitations on claims, such as champerty in common law and provisions in civil law (eg, Article 1699 of the French Civil Code).
  • Through the “indirect” approach by investment in either the debt or equity of a company that has one principal asset – its arbitration claim: These “single play” companies often go public with one main asset (typically in the extractive industries or the oil and gas sphere). The boom in those sectors has enabled those companies to achieve enormous valuations. However, in many cases those investments failed and the companies’ share and bond prices declined precipitously. Some of those companies (for a variety of reasons) have brought arbitrations against the state in which they made their investment (often assisted by excellent lawyers). Examples are Gold Reserve, Brilliant Resources and Pacific Wildcat, all with claims worth far more than their capital). It is possible, either by purchasing the equity or the debt of those companies, at an enormous discount, to acquire a stake in the outcome of an arbitration case. While a very effective way of investing in an arbitration claim, this indirect approach is not without its dangers, he cautions.
  • Through the “portfolio” approach by investing in one of the numerous litigation funds that finance arbitration. While these funds have been performing well for now, the question, from an investor’s perspective, is whether they will continue to be able to source good quality claims as they grow bigger and the playing field gets crowded.
Griffin concluded by discussing some of the pitfalls that can arise in the context of international arbitration and EM debt investment colliding by relating his understanding of the ongoing Tristan case, which culminated in a three way standoff among Tristan’s shareholders, bondholders and the Republic of Kazakhstan. The lack of communication and sufficient knowledge about how arbitration actually works has contributed to the challenges facing an EM investor interested in playing this game. He also suggested that selling awards that are too big is problematic (the proper “discount” is difficult to ascertain), and that in the future standardization of documents by trade associations for the trading of these arbitral awards would be useful.