Collective Action Clauses in Sovereign Bond Contracts and Investment Treaty Arbitration – An Approach to Reconcile the Irreconcilable

Among various attempts to achieve swift and orderly sovereign debt restructuring (“SDR”), the approach to include collective action clauses (“CACs”) in bond contracts has been widely adopted. CACs are expected to reduce the holdout litigation risk as they allow a specified supermajority of creditors to impose changes to the restructuring terms on holdout creditors. Meanwhile, SDR faces a new challenge in the sphere of the law on foreign investment: recent investment arbitration tribunal decisions on SDR opened the gate to investment treaty arbitration for holdout creditors. Investment arbitration has potential to surpass the contractual restrictions set by CACs and therefore undermine the primary purpose of CACs to reduce the risk of holdout litigation. This may cause delay in the SDR process, which is not in the best interest of either the creditors or the debtor state’s economic recovery. The protection of foreign investments should be, therefore, balanced against the need for a swift SDR. Against this background, this article argues that a way to achieve the balance is to set limits on the use of investment treaty arbitration by holdout creditors, and defaults and restructurings of international bonds and/or the implementation of CACs should be excluded from the scope of investment treaty arbitration. This is because while liabilities under investment treaties arise from the exercise of sovereign power of the host state, such acts do not constitute acts of a sovereign with respect to the bondholders but remain in the realm of commercial transactions. To demonstrate this, this article first examines the distinction between acta jure gestionis and acta jure imperii, which has been developed in the context of the doctrine of restrictive state immunity, and finds that issuance and default of international sovereign debts have been treated as commercial activities by English and US courts, the two major dispute settlement forums for disputes arising from international sovereign bonds. Bearing in mind the difference between (a) the question these courts face (i.e. whether they have jurisdiction over contractual claims) and (b) the question before investment treaty arbitration (i.e. whether there are treaty claims to be protected by investment treaties), this article then argues that investment arbitration tribunals should reach the same conclusion as to the nature of the host state’s acts concerning international sovereign bonds/implementation of CACs. The criterion to delimit the boundaries is therefore as follows: the protection under investment treaties should not be extended to situations where the creditors’ rights are not subject to the exercise of the sovereign power of the debtor state, and where the relevant acts in the SDR process are the good faith implementation of CACs included in the original bond terms. It is hoped that the theory proposed by this article helps both SDR and the investment treaty regime to operate in harmony, without compromising each other’s interests.