What is at Fault in #GrieFault?

Simon Lester asks what part of Judge Griesa’s anti-Argentina injunctions would be actionable under WTO rules. This was a possibility I raised here. On Twitter, he asks “have other courts interpreted similar clauses differently than Griesa did?” and “Isn’t this US court enforcing a private contract, rather than interpreting statute/regulation?”

It’s a good question. My take is that the measures at issue would not be the underlying contractual term, but Griesa’s interpretation of it plus any judicial or executive branch efforts to enforce the holding.

First, on the question of the weight of precedent. There has not been much interpretation by courts of the so-called pari passu clauses which are at issue here. As SCOTUS Blog notes

One promise [by Argentina] was that any dispute would have to be settled under New York law.  And another was a so-called “equal treatment” guarantee.  That second promise goes by a Latin phrase, pari passu.  Loosely translated, it means that everybody gets treated the same when it comes to investors’ rights.  It is a standard part of almost all international borrowings by governments. …

Ultimately, a federal judge in New York City, Thomas P. Griesa (in time, fully supported by a higher court, the U.S. Court of Appeals for the Second Circuit), ruled that if Argentina made any more payments to the swap participants, it had to pay what it owed to the holdouts — that is $1.33 billion.  That, Judge Griesa said, is what pari passu means.

Argentina thinks pari passu means something else: only that it would treat the investors in a single borrowing the same, not that it would treat everyone in the world to whom it owed money the same.  The holdouts had a chance to make a swap, and they chose not to. 

The rival interpretations could be recast as to whether pari passu clauses guarantee equality of outcome (payment) or equality of opportunity (everyone given same procedural rights to make a deal).

The US argued for the latter interpretation in its amicus brief. The Obama administration lawyers said that the correct legal result (as a matter of New York contract law) is that which is consistent with settled expectations of the meaning of contractual terms at the time of original contract. Citing a long string of academic and historical publications, the US argued that the settled understanding was limited to procedural equality.

The US only identified two court cases (both in foreign courts) that had interpreted the clause, which is not surprising, given the rarity of sovereign defaults. The first case, Elliot Assocs., L.P. v. Banco de la Nacion, General Docket No. 2000/QR/92 (Court of Appeals of Brussels, 8th Chamber, Sept. 26, 2000) anticipated the Griesa interpretation, but did not contain “citation to any authority” for its interpretation, and “was viewed with almost universal consternation by international financial markets.” The US notes that the “Belgian government itself effectively overruled the Elliot decision in November 2004, by enacting legislation that precludes holdout creditors from obtaining orders blocking payments…”

In a later case “Republic of Nicaragua v. LNC Investments and Euroclear Bank S.A., Docket No. 240/03 (Brussels Commercial Ct. Sept. 11, 2003)”, a Belgian court made a similar injunction (following the Elliot precedent), which was later vacated. Similarly, a California court from May 21, 2001, (Red Mountain Finance, Inc. v. Democratic Republic of Congo, No. CV-00-0164 R (C.D. Cal.) (A-1369––A-1372)) made a similar injunction, but did not explain its reasoning and it was also vacated.

The US then noted an English precedent that went against Elliot:

The one court to examine the pari passu clause in depth since the Elliot decision was issued expressed skepticism regarding its conclusion. In Kensington Int’’l Ltd. v. Republic of the Congo, 2002 No. 1088, [2003] EWHC 2331 (Comm) (Commercial Ct. Apr. 16, 2003), the court denied an application for an injunction requiring Congo to make pro rata payments to its creditors. The court ultimately based its decision upon, inter alia, the excessive and intrusive nature of the injunction that was sought. Id. at ¶¶ 93-94. The court nonetheless observed that it gave ““little weight”” to the Elliot decision, which ““was made upon an ex parte application,”” id. at ¶ 63, and which was contrary to language in the Encyclopaedia of Banking Law stating that the pari passu clause is not violated ““merely because one creditor is, in fact, paid before another,”” id. at ¶ 67.

So, by the US’ own interpretation, Griesa’s interpretation was was not legally correct as a matter of contract law, was eventually overturned by the courts that had followed it, and had a rival and legally superior interpretation followed by English courts.

Still, relying on precedent one way or another seems shaky. As NML noted in its reply brief, the English court “did not interpret an equal-treatment provision, and denied relief based on other equitable factors.” It also argued that the US courts should be modest in upsetting New York law: “If the state-law issue Argentina raises were as important and recurring as it claims, state courts could address it in due course.” So the stronger argument might be more substantiation of the way pari passu is interpreted by market participants (over 90% of which accepted the Argentine restructuring).

Finally, over at IELP, Simon also asks:

 However, it seemed to me that GATS Article XIV(c) could offer a defense.  This provision allows measures that are:

necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this Agreement …

Again, I’m new to this topic, but isn’t the U.S. court simply enforcing a contract between the bondholders and Argentina?  In other words, this is just a measure necessary to secure compliance with basic contract law.  Unless the court’s interpretation of the contract in question is completely off the wall, I would think the court’s decision would satisfy the Article XIV chapeau, and thus be justified under Article XIV.

A US Article XIV defense would be weakened (perhaps fatally) by what I note above: the US position was that Judge Griesa did not interpret the pari passu clause in the only way imaginable, and indeed that the interpretation was contrary to settled law. It seems hard to imagine a necessity defense (where the possibility of alternative policies is a key factor) that would survive the argument that was the US’ own position in the domestic courts.

Finally, on a related note, Argentina has moved forward with petitioning the UN’s International Court of Justice for a ruling on the matter. Details are very sketchy, but this plan would require the US to submit to jurisdiction, which it has since rejected. Apparently, Argentina could petition the UN General Assembly for an advisory opinion on the matter, although it is not clear to me how that would work.

More importantly, it appears that Judge Griesa views the petition to the ICJ as putting Argentina in contempt of the US court. This is the kind of two-level judicial game that I find fascinating: Country pursues remedy for which it is potentially eligible under international law, but same effort puts in the crosshairs of a domestic court. It is kind of the inverse of the quandary (of international courts taking umbrage at domestic decisions) I analyzed for UNCTAD here.

I am guessing that the international lawyers that make up the WTO adjudication machinery would not look too kindly on Griesa dumping on the ICJ, arguably the key organ of international law. If Argentina were to pursue the WTO case, it might be able to cite Griesa’s attempted blocking of Argentina’s access to international legal remedies as a factor in arbitrary treatment under the “chapeau” of Article XIV. This provision reads that challenged measures should not be “applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where like conditions prevail, or a disguised restriction on trade in services” as an additional condition on top of the necessity-related provision Simon notes above.This would further complicate any US defense.

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