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Vultures in Courts: Why the UNCTAD Principles on Responsible Financing Cannot Stop Litigation



The decision of the US Supreme Court rendered in NML v. Argentina has enabled the vulture funds to enforce in full their claims against the payments to be made by Argentina in favour of those holders who had tendered their bonds under a previous exchange offer. This scenario may have a disruptive impact on the functioning of the financial markets and endanger the restructuring processes of sovereign debt. The race to the courts by the vulture funds could be stopped under the UNCTAD Principles on Responsible Financing where the behaviour of those creditors who acquire debt instruments of sovereigns in distress and remain aloof from a restructuring to secure preferential treatment is marked as abusive. Unfortunately, so far the legal status of this abusive behaviour is unable to overturn the interpretation of the pari passu clause under New York law given by the US Federal Courts which stands at the base of the problem. To overcome this impasse the suggestion is to insert in the UN proposal of a multilateral legal framework for sovereign restructuring processes a specific provision qualifying as overriding a mandatory restructuring plan approved through a certain quorum which has received certification by the IMF. This qualification would serve the purpose of applying the plan to all creditors, and not just to those who register under the process. Moreover, this qualification would be considered as part of the public policy of the states participating to the UN proposal so as to block the enforcement of judgments rendered in non-participating fora.



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1 Republic of Argentina v. NML Capital Ltd, 2014 US Lexis 4259 (16 June 2014).

2 At that time sovereign private debt was mainly constituted by syndicated debt, Buckley, R., ‘The Transformative Potential of a Secondary Market: Emerging Markets Debt Trading From 1983 to 1989’, (1998) 21 Fordham International Law Journal 1152.

3 See Wautelet, P., ‘Les fonds vautours’, in Audit, M. (ed.), Insolvabilité des Etats et dettes souveraines (2011), 99.

4 See Radin, M., ‘Maintenance by Champerty’, (1935–1936) 24 California Law Review 48.

5 The Court endorsed the characterization of Elliott's conduct made by Peru as ‘international piracy’, Elliott Associates L.P. v. Republic of Peru, 12 F Supp. 2d 328, 336, 343, and 356 (SDNY 1998).

6 Elliott Associates L.P. v. Banco de la Nacion, 194 F 3d 363, 379 (2nd Cir. 1999).

7 Ibid., 380.

8 See Blackman, J. and Mukhi, R., ‘The Evolution of Modern Sovereign Debt Litigation: Vultures, Alter Egos, and Other Legal Fauna’, (2010) 73 Law & Contemporary Problems 47, at 53–55.

9 The acknowledgment of the pari passu clause in the loan agreements with sovereign borrowers pursues three main purposes: to prevent the earmarking of particular assets; to prevent the risk that a legal act of the borrower could alter the ranking of the existing debts; to prevent the risk of an involuntary subordination, since in certain legal systems it is possible to acquire seniority by a notarization of the debt instruments. See Buchheit, L. and Pam, J., ‘The Pari Passu Clause in Sovereign Debt Instruments’, (2004) 53 Emory Law Journal 869, at 901–4 and 911–14.

10 See P. Wood, Principles of International Insolvency (2007), 237.

11 According to Buchheit, L., ‘The Pari Passu Clause Sub Specie Aeternitatis’, (1991) International Financial Law Review 11, at 12, the aim of the clause is ‘[to] prevent the sovereign from attempting to legitimise the discrimination by enacting laws or decrees which purport to bestow a senior status on certain indebtedness or give a legal preference to certain creditors over others’.

12 The affidavit submitted by Professor Lowenfeld became the object of much criticism, Gulati, G. and Klee, K., ‘Sovereign Piracy’, (2001) 56 Business Lawyer 635, at 635–9.

13 See Wheeler, C. and Attaran, A., ‘Declawing the Vulture Funds: Rehabilitation of a Comity Defense in Sovereign Litigation’, (2003) 39 Stanford Journal of International Law 253, at 257–8.

14 In detail, the Court identified the lowering of the rank of the bonds in the payments made on the exchange bonds against the persistent refusal to honour the non-exchange bonds and the enactment of the Lock Law, Gelpern, A., ‘Contract Hope and Sovereign Redemption’, (2013) 8 Capital Markets Law Journal 132, at 138–9.

15 NML Capital Ltd. et al. v. The Republic of Argentina, 2012 US App Lexis 22281 (26 October 2012, 2nd Cir.).

16 ‘Thus, the two sentences of the Pari Passu Clause protect against different forms of discrimination: the issuance of other superior debt (first sentence) and the giving of priority to other payment obligations (second sentence)’, NML Capital Ltd. et al. v. The Republic of Argentina, supra note 15, at 18–19.

17 See G. Gulati and R. Scott, Three Half and a Minute Transaction. Boilerplate and the Limits of Contract Design (2013), 172.

18 Ibid.

19 ‘In short, the combination of Argentine's executive declarations and legislative enactments have ensured that plaintiffs’ beneficial interests do not remain direct, unconditional, unsecured and unsubordinated obligations of the Republic and that any claims that may arise from the Republic's restructured debt do have a priority in Argentinian courts over claims arising out of the Republic's unrestructured debt’, NML Capital Ltd et al. v. The Republic of Argentina, supra note 15, at 20.

20 NML Capital Ltd. v. the Republic of Argentina, 2012 US Dist Lexis 167272 (21 November 2012 SDNY), at 9–14.

21 ‘The less time Argentina is given to devise means of evasion, the more assurance there is against such evasion’, NML Capital Ltd. v. Republic of Argentina, supra note 20, at 10.

22 NML Capital Ltd v. Republic of Argentina, 2013 US App Lexis 17645 (23 August 2013 2nd Cir.).

23 In July 2014 District Court Griesa made an order blocking payments on bonds held by exchange holders, The Economist, 9 August 2014, 40.

24 ‘Participation in international debt rescheduling is voluntary’, National Union Fire Insurance v. People's Republic of the Congo, National Union Fire Insurance v. People's Republic of the Congo, 729 F Supp 936, 944 (SDNY 1989).

25 ‘[T]he underlying obligations to pay nevertheless remain valid and enforceable’, Allied Bank International v. Banca Credito Agricola de Cartago, 757 F 2d 516, 519 (1985).

26 ‘This Court will recognize and enforce the default judgment despite the existence of the London Club Agreement;’ otherwise, ‘it would have the effect of depriving a creditor of its right to choose whether to reschedule a debit or to enforce the underlying obligation to pay’, National Union Fire Insurance v. People's Republic of the Congo, supra note 24, at 944.

27 ‘This second interest limits the first so that, although the United States advocates negotiations to effect debit reduction and continued lending to defaulting foreign sovereigns, it maintains that creditor participation in such negotiations should be on a strictly voluntary basis’, Pravin Banker Associates Ltd. v. Banco Popular del Peru, 109 F 3d 850, 855 (2nd Cir. 1997).

28 See Art. 1, sec. 10, cl. 1 of the US Constitution under which states are called to refrain from enacting laws which impair the obligations of contract.

29 See Gathii, J.. ‘The Sanctity of Sovereign Loan Contracts and its Origins in Enforcement Litigation’, (2006) 38 George Washington International Law Review 251, at 303.

30 ‘[I]t is not the function of a federal district court in an action such as this to evaluate the consequences to the debtor of its inability to pay,’ A.I. Corporation v. Government of Jamaica, 666 F Supp 629, 633 (SDNY 1987).

31 Elliott Associates L.P. v. Banco de la Nacion, 194 F 3d 363, 380 (2nd Cir. 1999).

32 The Court implicitly affirmed that a temporary suspension of the proceedings or of the execution of the judgment was consistent with the respect of the creditors’ rights, Pravin Banker IV, supra note 27, at 855.

33 ‘The District Court declined to use its discretionary authority in a manner that would entail such risk, and we will not disturb the Court's exercise of its discretion,’ E.M. LTD et al. v. The Republic of Argentina, 131 Fed Appx 745, 747 (2nd Cir. 2005).

34 This analysis is coherent with the opinion expressed by the Department of State in its Statement of Interest. This emphasised that if the holdout creditors were allowed to pursue these remedies with the purpose of collecting payments due to them under the bonds, the voluntary participation in the restructuring process by the exchanging creditors would have been endangered. See Schmerler, C., ‘Restructuring Sovereign Debt’, in Silkenat, J. and Schmerler, C. (eds.) The Law of International Insolvencies and Restructurings (2006), 431, at 454.

35 NML Capital Ltd. et al. v. The Republic of Argentina, supra note 15, at 27.

36 CACs include not only majority action clauses, but also collective representation clauses, majority enforcement clauses and engagement clauses, Ahdieh, R., ‘Between Mandate and Market: Contract Transition in the Shadow of the International Order’, (2004) 53 Emory Law Journal 691, at fn. 15.

37 See infra, § 3.1.

38 See comment sub Principle 15.

39 See Gelpern, supra note 14, at 145.

40 See Ripert, G., ‘Les régles du droit civil applicables aux rapports internationaux’, (1933-II) 44 RCADI 565, at 618. Politis, N., ‘Le probléme des limitations de la souverainité et la théorie de l’abus des droits dans les rapports internationaux’, (1925) 6 RCADI 1, at 86–94, emphasized that in the exercise of non-regulated freedoms states are called upon to temper their individualistic action with the superior interest of the international community, on this point see also H. Lauterpacht, The Function of Law in the International Community (2011), 306–30.

41 See Kiss, A., ‘Abuse of Rights’, in Wolfrum, R. (ed.), MPEPIL (2006), para. 10. The uncertainties on its reception within the general principles of law originated from the fact that the doctrine is not universally acknowledged in every municipal legal system, see Schwarzenberger, G., ‘Uses and Abuses of the “Abuse of Rights” in International Law’, (1956) 42 Transactions of the Grotius Society 147, at 150–2.

42 See Kiss, supra note 41, at paras 4–6.

43 Ibid., at para. 12.

44 ‘[The alienation] was not designed to procure for one of the interested Parties an illicit advantage and to deprive the other of an advantage to which he was entitled’, Case Concerning Certain German Interests in Polish Upper Silesia (Merits) (1926) PCIJ Series A No. 7, at 37–38.

45 Free Zones of the Upper Savoy and the District of Gex, PCIJ (1932) Series A/B No. 46, at 167.

46 United States-Import Prohibition of Certain Shrimp and Shrimp Products, decision of 12 October 1998, WT/DS58/AB/R, para. 158, at (accessed 12 August 2015). The Appellate Body referred to this principle as an means to interpret the rule contained in Art. XX of the GATT, concerning the conservation of exhaustible natural resources, in order to avoid an application by the United States of a measure amounting to unjustifiable or arbitrary discrimination. In this regard, the principle of abuse of rights may be used to solve normative conflicts, Byers, M., ‘Abuse of Rights: An Old Principle, A New Age’, (2002) 47 McGill Law Journal 389, at 419–20.

47 See B. Cheng, General Principles of Law (1987), 130. In the North American Dredging Company Claim (1926) IV RIAA 26, 27, the Mexican-United States General Claims Commission held that its task was to find ‘such limitation of both rights as will render them compatible with the general rules and principles of international law’.

48 See Cheng, supra note 47, at 134.

49 A/RES/65/144 (2011), point 3.

50 At (accessed 12 August 2015). The Principles are the outcome of the UNCTAD Project on Promoting Responsible Sovereign Lending and Borrowing.

51 See Brummer, C., ‘Why Soft Law Dominates International Finance – and Not Trade?’, (2011) 13 Journal of International Economic Law 623.

52 See Bohoslavsky, J. and Esposito, C., ‘Principles Matter: The Legal Status of the Principles on Responsible Sovereign Financing’, in Esposito, C., Li, Y., and Bohoslavky, J. (eds.) Sovereign Financing and International Law (2013), 86.

53 The Principles have been derived by analogy from domestic legal systems: only a few reflect customary law (corruption, necessity); most of them may be classified as general principles of law (agency, authorisation, bindingness), emerging principles (assessment of borrower's capacity, lender's due diligence), guiding principles (audits, disclosure of information), or structural principles (avoiding overborrowing). See M. Goldmann, Responsible Sovereign Lending and Borrowing: The View From Domestic Jurisdictions (2012).

54 See the comment sub Principle 7, at (accessed 12 August 2015); see also A. Bredimas, A. Gourgourinis, and G. Pavlidis, ‘The Legal Contours of Sovereign Debt Restructuring under the UNCTAD Principles: Antagonism and Convergence Between Standards of Domestic Insolvency Law and International Investment Protection Law’, in Esposito et al., supra note 52, 135, at 148–9.

55 Lightwater Corp. Ltd. et al. v. Republic of Argentina, 2003 US Dist 6156, at 13 (SDNY 14 April 2003).

57 In this respect in Paquette Habana, 20 S Ct 290, 329 (1899), Justice Gray specified that ‘where there is no treaty, and no controlling executive or legislative act or judicial decision, resort must be had to the customs and usages of civilized nations’.

58 See Schrader, H., ‘Custom and General Principles as Sources of International Law in American Federal Courts’, (1982) 82 Columbia Law Review 751, at 765–7.

59 See A. von Bogdandy and M. Goldman, ‘Sovereign Debt Restructurings as Exercises of International Public Authority’, in Esposito et al., supra note 52, 39, at 68.

60 Cf. the Preamble of the UNIDROIT Principles 2010.

61 The Guiding Principles are annexed to the Report of the Independent Expert on the effects of foreign debt and other related international financial obligations of states on the full enjoyment of all rights, particularly economic, social, and cultural rights, A/HRC/20/23 (2012), and received endorserment by Human Rights Council Resolution A/HRC/20/10 (2012). The normative contribution of the HRC Guiding principles lies in identifying existing basic human rights standards applicable to sovereign debt and related policies, as well as in elaborating the implications of these standards (point 17).

62 The proposed French piece of legislation was modelled on Art. 1699 of the French Civil Code which forbids champertous litigation. See Wautelet, supra note 3, at 120–1.

63 See Wautelet, supra note 3, at 124–5.

64 See Waibel, M., ‘Debt Relief to Poor Countries: Rules v Discretion’, (2010) 25 BJIBFL 295.

65 See Wautelet, supra note 3, at 124. The UK initiative induced two holdouts on Liberia to accept the terms on offer from the IDA managed Debt Reduction Facility; see IMF and IDA, Heavily Indebted Poor Countries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI) – Status of Implementation and Proposals for the Future of the HIPC Initiative (2011), at 17.

66 See D. Sookun, Stop Vulture Funds Lawsuits. Commonwealth Secretariat (2010), at 90–91.

67 HR 5564.

68 The content of this truly international public policy or transnational public policy ‘is the one that establishes universal principles, in various fields of international law and relations, to serve the higher interests of the world community, the common interest of mankind, above and sometimes even contrary to the interests of individual nations’, Dolinger, J., ‘World Public Policy: Real International Public Policy in the Conflict of Laws’, (1982) 17 Texas J Int’l L, 167, at 172, although its emergence and formalization remain in fieri, Forteau, M., ‘L’ordre public “transnational” ou “réellement international”’, (2011) 138 JDI 3, at 10–11.

69 See Bismuth, R., ‘L’émergence d’un “ordre public de la dette souveraine” pour et par le contrat d’emprunt souverain? Quelques réflexions inspirées par une actualite´ trés mouvementée’, (2012) 58 AFDI, 589, at 502–3.

70 A/RES/68/304 (2014).

71 The ad hoc Committee was established pursuant to General Assembly Resolution A/RES/69/247 (2014).

72 A/69/466/Add.3. Within the Second Committee the draft resolution encountered the fierce opposition of a significant number of countries, among which the United States whose courts have triggered the problem with the vulture funds. The adoption of the resolution by the General Assembly was deferred for budgetary reasons, A/C.2/69/L.59.

73 See M. Hudson, International Tribunals (1944), 210–12.

74 The proposal was not fated to meet the enthusiasm of the financial circles, Domke, M., ‘Dispute Settlement of International Loans’, in McDaniels, J. F. (ed.) International Financing and Investment (1964), 525, at 533.

75 See Robert, E., ‘Rééchelonnement de la dette ou réglement judiciare?’, in Carreau, D. and Shaw, M. (eds.) La dette extérieure/The External Debt (1995), 608, at 633–4.

76 IMF, The Design of the Sovereign Debt Restructuring Mechanism – Further Considerations (2002).

77 See M. Megliani, Sovereign Debt: Genesis, Restructuring, Litigation (2015), 571–3.

78 See Bartholomew, E., Liuzzi, A., and Stern, E., ‘Two-Step Debt Restructuring: A Market-Based Approach in a World Without International Bankruptcy Law’, (2004) 35 Georgetown Journal of International Law 859, at 859–60.

79 See supra, § 2.2.

80 The draft may be simply endorsed by the General Assembly along the same lines as the Articles on State Responsibility, may be approved like the UNCITRAL Arbitration Rules, or adopted as a multilateral convention opened to the signature of the member states.

81 The DSA depends upon the countries at hand: for middle-income countries a debt is considered sustainable as long as the debtor is able to continue servicing the debt without an unrealistically large future correction in the balance of income and expenditure, IMF, Assessing Sustainability (2002); while for low-income countries, the IMF and the World Bank have introduced a Joint Debt Sustainability Framework, under which a DSA consists of an analysis of a country's projected debt burden over 20 years and its vulnerability to external and policy shocks, an assessment of the risk of debt distress in that period in the light of indicative debt burden thresholds, and recommendations for borrowing and lending aimed at limiting the risk of debt distress, The Joint World Bank-IMF Debt Sustainability Analysis for Low-Income Countries (2005), at (accessed 12 August 2015).

82 This voting requirement corresponds to the voting requirement under the EU Common Terms of Reference, at (accessed 12 August 2015), where it is necessary that reserved matters be modified through an affirmative vote of not less than 75 per cent of the aggregate principal amount of the outstanding bonds present at the meeting or by the written consent of not less than two-thirds of the aggregate principal amount of the outstanding bonds; cross-series modifications require also the affirmative vote of more than two-thirds of the aggregate principal amount represented at separate meetings of each series affected by the proposed modifications or the written consent of more than half the aggregated principal amount of each series affected by the proposed modifications. These percentages are calculated on a voting quorum of two-thirds of the outstanding bonds, with the result that what is needed is an affirmative vote of 50 per cent of the principal amount of the debt class coupled with 45 per cent in each series. See Hofmann, C., ‘Sovereign-Debt Restructuring in Europe Under the New Model Collective Action Clauses’, (2014) 49 Texas International Law Rev 383, at 402.

83 See Art. 9(1) of Rome I Regulation which defines overriding mandatory provisions as: ‘provisions the respect of which is regarded as crucial by a country for safeguarding its public interests, such as its political, social or economic organisation, to such an extent that they are applicable to any situation falling within their scope’, European Parliament and of the Council Regulation (EC) 593/2008 of 7 June 2008 on the law applicable to contractual obligations (Rome I) [2008] OJ L 177/6.

84 Unofficial translation in English available at (accessed 12 August 2015).

85 Such a provision would resemble Art. VIII(2)(b) of the IMF Articles of Agreement where exchange contracts involving the currency of any member and contrary to the exchange control regulations of that member, maintained or imposed in accordance with the Agreement, cannot be enforced in the territories of any member, see Proctor, C. (ed.) (2005) Mann on the Legal Aspect of Money (2005), 378407. The alternative choice could be to immunize the assets of foreign debtors located in contracting fora, but this umbrella would operate within a limited lapse of time at the end of which vultures’ action can resume, see Buchheit, L. C., Gulati, M., and Tirado, I., ‘The Problem of Holdout Creditors in Eurozone Sovereign Debt Restructurings’, (2013) 4 BJIBFL 191.

86 The attitude of the United States may be easily inferred from the previous contrariety to the SDRM and to actual adversity to the framework expressed within the UN GA Sixth Committee.

* Senior Research Fellow (tenure holder) in International Law, Catholic University of Milan [].


Vultures in Courts: Why the UNCTAD Principles on Responsible Financing Cannot Stop Litigation



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