Jay Newman was a senior portfolio manager at Elliott Management. Thomas Eymond-Laritaz is the founder and CEO of Highgate, a strategic advisory company.
Gunboat diplomacy is out of favour, but you have to hand it to the mercantilists: it worked. What doesn’t work is the current regime of arbitration through bilateral investment treaties and subsequent misadventures in enforcement.
Once hailed as a more efficient means of resolving international investment disputes, arbitration has degenerated into an arcane, interminable, and freakishly expensive process.
Except for the time and cost, it kind of works — if a country pays up. Most countries do. But it fails completely when governments refuse to satisfy awards or court judgments.
Having invested years of effort and millions of dollars (sometimes tens of millions) in legal fees, creditors of refuseniks end up in court anyway. That’s when creditors find themselves in a special kind of hell, because, at that point, all bets are off: enforcement litigation causes legal costs to skyrocket, leading to years of uncertainty.
There are lots of reasons why politicians and government officials renege: pols don’t like writing checks to foreign investors; defying capitalists can bolster the image of faltering, nationalist governments; bureaucrats fear reprisals; it’s expedient to pay a few legal bills, hoping the debt becomes someone else’s problem. In short, the countries that don’t pay usually refuse payment because their leaders are counselled that it’s not in their personal best interest.
That’s really bad advice. Not just because it misapprehends the fact that paying legitimate debts is salutary: it’s an oppotunity for sovereigns that have screwed up to make things right and, with some creativity, advance the case for additional foreign direct investment.
Consider six cases in point: India, Congo, Spain, Uruguay, Argentina and Uruguay.
India deployed some of the most extreme approaches to avoiding liability for violating the rights of investors. Since 2016, India has unilaterally terminated its bilateral and multilateral investment treaties with scores of countries, seeking to renegotiate them under a model that won’t protect foreign direct investors at all.
Indonesia, South Africa, Venezuela, Ecuador, and Bolivia have followed suit, choosing to terminate some, or all, of their BITs. Treaty terminations have effect prospectively, but India also acts in the here and now. To avoid a $1.3bn arbitration award in favour of foreign telecom investors (a case where one of us is involved) India has attempted to raise putative fraud claims well after arbitration proceedings ended. As part of that effort, India has even issued Interpol Red Notices, seeking extradition of an American executive. Not least, the Indian government has enlisted its judiciary to paper over those efforts.
Congo offers another telling example of a self-defeating sovereign strategy. A modest dispute between a foreign construction company and the president of Congo turned into a behemoth. An initial award of €110mn has been accruing interest since 2000: it now exceeds €1.7bn, about 12 per cent of the country’s GDP. Political stubbornness can come at a high price.
Spain’s behaviour demonstrates how even some Western democracies jump the rails. Fifty-one claims have been filed for violation of Energy Charter Treaties by retroactively reducing feed-in tariffs for renewable electricity. So far, 27 claims have resulted in awards against Madrid, now totalling over €1.5bn. To date, Madrid seems intent on refusing to pay, based on a suspect ruling by the Court of Justice of the European Union (CJEU) that has been rejected by courts outside the EU.
Then — once again — there’s Argentina. Historical mismanagement has left president Javier Milei with massive unsatisfied judgments and arbitration awards and a punishing amortisation schedule for both private sector and IMF debt over the next several years.
Milei is keen to break Argentina’s historical pattern of default. For his program to succeed, he’s got to prove to foreign investors that he can play by the rules. But the size of the awards and judgments against the state would consume such a large proportion of GDP that everything else — paying teachers, doctors and bus drivers — would be crowded out.
Argentina’s historic violation of international law seems contagious. Uruguay prides itself on being a beacon of democracy and rule of law in Latin America. But since losing its first investor state dispute in February 2024, it has refused to pay foreign investors.
Court battles rage because the entire system is rigged to default to legal battles. Lawyers for countries and for investors invariably tout their next best idea for crushing the other side. It’s a rare lawyer who counsels clients that — once an award or judgment has become final — efforts to use the courts to force countries to pay are self-defeating.
That’s not to say that, from time to time, creditors will not find assets and execute on them. Citgo is one example — but a rare one.
So what can be done? Probably nothing structural, sadly. But a vibe shift by everyone involved would help. The reality is that most investor-state disputes are resolved through negotiated settlements that find creative ways to bridge the gap between creditors and debtors.
This can be difficult. Creditors are often accused, with some reason, of having tunnel vision. After spending so much time and money obtaining judgments, they are seduced by the idea that the stick alone will eventually cause governments to capitulate. Reality is more nuanced.
When two sides have spent years watching their mercenaries exchange blows, the hardest part is getting to the negotiating table: backchannel conversations that resolve sovereign claims are more in the realm of diplomacy than of law and finance.
People who run countries respond to different sets of incentives than do finance types. The benefits of resolving long-running legal disputes can be great, but they’re intangible, such as establishing — or re-establishing — a national reputation for adherence to a rule of law, which enhances attractiveness as a destination for foreign direct investment.
When claims are large, as many are, part of the problem lies in finding common ground: settlements have to be structured to make financial sense to the country. And, sometimes, it can work.
In 2016, litigious creditors did an about-face: they facilitated Argentina’s re-entry into international capital markets by dropping their lawsuits, and a portion of the proceeds from the sale of new bonds was used to satisfy outstanding judgments. Back in the day, Mexico broke new ground by issuing “new money” bonds that favoured lenders that invested fresh cash: that eased a financial crunch and saved face. In the Philippines, creditors swapped dollar debt for newly issued peso bonds that became a new currency for direct investment. Invariably, when there is willingness, there are solutions.
Investor-state arbitration and litigation is a broken system. It can be made more efficient by remembering that the legal process is just one tool among many. Failure to continually assess alternatives to lawsuits is a mistake that leads to astronomical costs and delays.
Hackneyed as it might seem, Ecclesiastes nailed it: there is a time for war and a time for peace. Most investor-state disputes are resolved through settlements where both sides gain.
