Venezuela's Debt Crisis: Why Litigation Is More Advantageous than Arbitration for Bondholders

Abstract

As more and more Venezuelan debt becomes past due, holders of the Republic’s $36 billion of sovereign bonds are faced with an interesting choice should they wish to exercise remedies. The traditional response of an aggrieved bondholder would be to obtain a judgment for missed payments (either before or after an acceleration of the bonds) under New York law and in the courts of New York or London as provided for in the applicable bond documentation. Despite the fact that Republic’s bond documentation includes several bondholder-friendly protections to facilitate obtaining a court judgment, some commentators have nonetheless proposed investment arbitration as a plausible and preferred alternative to New York or London court litigation for bondholders seeking to recover on their defaulted bonds. These commentators ground their recommendation on the perceived advantages an arbitral award subject to the ICSID Convention offers over a New York or English court judgment, believing that such an award would permit them to seek enforcement worldwide on an accelerated time frame. This ICSID approach obtains its inspiration from the Abaclat arbitration filed by tens of thousands of retail Argentine bondholders in which they established ICSID jurisdiction over claims for defaulted bonds and eventually received partial payment in settlement with Argentina last year. In the authors’ view, court litigation offers a preferable alternative to treaty-based arbitration for Venezuela’s bondholders looking to recover outstanding principle and interest. We first address the benefits offered by ICSID arbitration and explore how the Abaclat claimants fared in comparison to other Argentine bondholders who litigated claims in the New York federal court and settled those claims with Argentina. We then explain why pursuing treaty arbitration would not appear to be preferable for Venezuela’s sovereign bondholders. Our conclusions are relatively straightforward. First, it is doubtful that an ICSID Convention tribunal would have jurisdiction over any bondholders’ claims given Venezuela’s 2012 denunciation of the ICSID Convention. Second, even if treaty arbitration were available other than under the ICSID Convention, that option would not be open to U.S. holders and for other holders such proceedings would likely take far longer to obtain an award than it would take to obtain a court judgment in the United States or England. Finally, the rationale cited by those recommending ICSID arbitration for Republic bondholders, namely that United States sanctions may limit enforcement efforts within the United States thus making global enforcement efforts that much more important, is in our view questionable given the intent of those sanctions. In any event, enforcement of a New York or English court judgment outside the Unites States (as compared to the enforcement of an arbitral award) would not present any comparative timing disadvantages for aggrieved bondholders. Indeed, in many jurisdictions such as within the European Union, we believe enforcement would be faster and more efficient than pursuing a non-ICSID arbitral award.