The UK's Supreme Court enforces New York Sovereign Bond Judgment
The Supreme Court of the United Kingdom has recently decided that a New York judgment against the Republic of Argentina in respect of outstanding sovereign bonds can be enforced against the debtor's assets located within England and Wales. This Client Advisory examines the effect of the judgment and its implications.
The activities of so-called "Vulture Funds" have attracted a significant amount of attention in recent years. At a political level, commentary has tended to be adverse for a variety of reasons, e.g., because (i) the Funds target sovereign debtors experiencing serious financial difficulty and (ii) they tend to disrupt voluntary restructuring of debt which is perceived to be in the interests of the debtor nation itself and the wider body of creditors. Unsuccessful attempts to legislate against their activities include "The Stop the Vulture Funds Act", introduced into Congress in August 2008 and, in the United Kingdom, the more prosaically titled "Developing Country Debt (Restriction of Recovery) Bill", introduced into the House of Lords in May 2009.
In the context of legal proceedings, however, the courts have tended to give effect to strict contractual rights under bonds and loan contracts, even though the holders may have purchased these investments at deep discounts to face value and with the specific intention of launching enforcement proceedings. In relation to Argentina itself, much of the relevant litigation has taken place in New York because (i) the relevant bonds were originally issued through that market and (ii) the documentation will accordingly have included an explicit submission to the jurisdiction of those courts.
But that is not the complete story. Although judgment may have been obtained in New York, the debtor may have assets in other financial centres, such as London. The creditor looking for avenues of enforcement may therefore seek to "export" his judgment and rely on it in other countries. This was precisely the situation that arose for decision before the United Kingdom's Supreme Court in NML Capital Limited v Republic of Argentina, where judgment was handed down on 6 July 2011.
The Background to the Proceedings
The decision concerned bonds issued by the Republic of Argentina in February and July 2000 under the terms of a Fiscal Agency Agreement with Bankers Trust Company. In the midst of a severe economic crisis, Argentina declared a moratorium in respect of the bonds and its other external indebtedness in December 2001. Over an extended period, NML Capital purchased Argentine bonds amounting to US$ 172,153,000 at a price that was a little over half of their total face value.
The documentation contained the usual selection of New York law as the proper law of the bonds, and a submission to local jurisdiction. Accordingly, following the declaration of events of default and the acceleration of the bonds, NML started recovery proceedings in the US District Court (Southern District of New York). On 11 May 2006, Judge Thomas P Griesa gave judgment for the amounts owing under the bonds which, by that time, had grown to some US$ 248,184,632.20. The judgment remaining unsatisfied, NML looked to enforce it in England.
Now, perhaps surprisingly, there is no convention or other reciprocal arrangement for the mutual recognition and enforcement of judgments between the United Kingdom and the United States. However, subject to various conditions, the English courts will enforce the judgment of a foreign court, effectively on the basis that the foreign decision is recognisable evidence of a debt owing by the defendant. Nevertheless, a number of points were raised by Argentina by way of defence to the request for the local enforcement of the New York judgment. The arguments raised by Argentina related principally to its position as a sovereign State and the immunities to which it is entitled under both domestic and international law. For the purposes of this Advisory, these may be distilled into three essential points, namely (i) the "commercial transactions" issue, (ii) the submission to jurisdiction issue and (iii) the recognition of judgments issue. These will be considered in turn.
The "Commercial Transactions" Issue
In general terms, a foreign State is immune from proceedings before the English courts by virtue of section 1, State Immunity Act 1978. However, there are a number of exceptions to this general rule and, in harmony with s1605(a)(2) of the US Foreign Sovereign Immunities Act, a State is amenable to "…proceedings relating to…..a commercial transaction entered into by a State…". For these purposes, "commercial transaction" includes "…any loan or other transaction for the provision of finance…". These provisions reflect the so-called restrictive doctrine of State immunity, under which a foreign State is immune in respect of official or governmental acts but can be sued in respect of trade, commercial or financial activities.
Two members of the Supreme Court held that the proceedings did indeed relate to a "commercial transaction" within this definition and, at first glance, this seems to be an obvious and logical conclusion. Yet this was an unusual case. NML was not seeking adjudication of a dispute arising from the bonds, since it already held a final judgment from the New York court. This led the other three members to decide, in substance, that (i) the proceedings did not relate to the bonds themselves, but to the New York judgment which had superseded the original claims and (ii) the New York judgment was not itself a "commercial transaction" within the scope of the exception outlined above.
Under these slightly unusual circumstances, Argentina would have been immune from enforcement proceedings in the United Kingdom if NML's attempt to enforce the New York judgment had relied solely upon the "commercial transaction" exemption in the State Immunity Act 1978.
However, NML had two further lines of argument available to it.
The Submission to Jurisdiction Issue
As noted above, the bonds were issued by the Republic of Argentina in the New York markets and governed by New York law. There was thus no immediately obvious jurisdictional nexus which would entitle the English courts to make enforcement orders against the assets of Argentina held within England. However, the English courts can exercise such powers if the defendant has expressly submitted to the jurisdiction of the English courts.
In that context, section 2(2), State Immunity Act reads "…a State may submit [to the jurisdiction of the courts of the United Kingdom] … by a prior agreement, but a provision in any agreement that it is to governed by the law of the United Kingdom is not to be regarded as a submission…". It thus became necessary to decide whether the bonds contained a sufficient submission on the part of Argentina for these purposes. The bonds included provisions to the following effect:
"…[any judgment relating to the bonds] shall be conclusive and binding upon [Argentina] and may be enforced in any specified court or in any other courts to the jurisdiction of which the Republic is or may be subject (the "other courts") by a suit upon such judgment…
To the extent that the Republic… shall be entitled, in any jurisdiction.. in which any… other court is located in which any suit, action or proceeding may at any time be brought solely for the purpose of enforcing or executing any related judgment, to any immunity from suit, from the jurisdiction of any such court,… from execution of a judgment or from any other legal or judicial process or remedy, and to the extent that in any such jurisdiction there shall be attributed such an immunity, the Republic has irrevocably agreed not to claim and has irrevocably waived such immunity to the fullest extent permitted by the laws of such jurisdiction… for the purpose of enabling…a holder of securities of this series to enforce or execute a related judgment…"
The Supreme Court held that this contractual provision was not merely a waiver of Argentina's immunity but also constituted a submission to the jurisdiction of the courts of any country – including England-- in which enforcement proceedings might be attempted. In other words – and leaving aside the pure question of State immunity—Argentina had agreed to submit to the jurisdiction of the courts of any country in which a New York judgment could be enforced. England was such a jurisdiction because, subject to court permission, its Civil Procedure Rules explicitly allow for the service of English process on a non-resident defendant where the objective is to enforce a foreign judgment or arbitration award against assets located in England. Consequently, the relevant contractual provision, read together with section 2(2) of the 1978 Act, were sufficient to constitute both a submission to jurisdiction and a waiver of immunity on the part of Argentina. As a result, the English courts could exercise jurisdiction over Argentina in this particular case.
Although the issue is not discussed in the Supreme Court judgments, it may be noted in passing that any eventual enforcement against specific assets belonging to the Republic will be governed by section 13, State Immunity Act. That section again seeks to draw a balance between the special privileges of a foreign State and the rights of creditors. The section provides that "…the property of a State shall not be subject to any process for the enforcement of a judgment…". However, it is then provided that this general rule "…does not prevent… the issue of any process with the written consent of the State concerned… any such consent (which may be contained in a prior agreement) may be expressed so as to apply to a limited extent or generally, but a provision merely submitting to the jurisdiction of the courts is not to be regarded as a consent [for these] purposes…"
In other words, it is legitimate for bonds or other finance documents to include an agreement by the State that the creditor can take enforcement action against the assets of that State in order to secure amounts due under any judgment. However, given that the issue of enforcement process against a foreign State is clearly a drastic step, the enforcement agreement must be explicitly stated; in particular, it will not be inferred from the mere fact that the parties have nominated a particular court to settle any disputes. At a later stage of the proceedings, it may be necessary to decide whether the clause reproduced above contains a sufficient consent for the purposes of section 13 of the 1978 Act.
The Recognition of Judgments Issue
A final issue – on which all members of the Supreme Court agreed – turned on section 31 of the Civil Jurisdiction and Judgments Act 1982. That Act was passed to give effect to the Brussels Convention on Jurisdiction and Judgments, 1968, but the scope of the 1982 Act is not limited to Convention countries.
Section 31 of the 1982 Act effectively provides an independent code for the recognition and enforcement in England of a judgment given in a foreign court against a foreign State. Unfortunately, the relevant statutory provisions are a little confused in some respects but, in essence, such a judgement can be enforced in England if:
- the judgment is of a kind that would have been enforced in England regardless of the status of the defendant (that is to say, the judgment cannot be impeached on grounds of public policy, fraud or certain other grounds); and
- the foreign court had jurisdiction over the defendant State in line with the restrictive immunity doctrine described above (i.e., the State had voluntarily submitted to the jurisdiction and/or the subject matter of the dispute was of a commercial character).
Given that the propriety of the New York judgment was not challenged and that Argentina had expressly submitted to the jurisdiction of the New York courts in the context of a commercial matter, the criteria outlined in (a) and (b) above were therefore met. The New York judgment could thus be recognised and enforced in England on that basis.
Conclusions and Implications
As noted above, the members of the Supreme Court disagreed on the application of the State Immunity Act 1978 and the "commercial transactions" exception in this case. This may appear surprising but it can perhaps be explained by the unusual nature of the case – in particular, the court was being asked to recognise and enforce a foreign judgment, and was not being asked to adjudicate on the underlying transaction itself.
In practice, however, this slight area of disagreement will be of limited practical importance. The Supreme Court were unanimous in deciding that (i) a submission to jurisdiction in standard form should be sufficient to allow an English court to recognise and give effect to a judgment given in a foreign court that had jurisdiction over the debtor State and (ii) quite apart from that, such judgments would generally be enforceable under section 31, Civil Jurisdiction and Judgments Act 1982.
This decision will obviously be of assistance to creditors of sovereign borrowers or issuers who find themselves obliged to pursue payment by means of legal proceedings. However, it may not apply to later bond issues where the use of collective action clauses – designed to prevent action by individual creditors from disrupting a consensual restructuring-- have become prevalent.