Monday, August 15, 2011

UK Supreme Court Rules that NY Hedge Fund Affiliate Can Bring Action against Argentina for Sovereign Debt Default

The UK Supreme Court ruled that an affiliate of a New York-based hedge fund that purchased bonds issued by the Republic of Argentina could enforce a US federal court judgment against assets held by Argentina in England by bringing a common law action on the judgment in London. Two legislative exceptions to the doctrine of state immunity were applied by the members of the Court in four separate opinions to allow the action. Lord Phillips and Lord Clarke found that the hedge fund’s claim fell within the scope of the exception in section 3(1)(a) of the State Immunity Act of 1978 for proceedings related to a commercial transaction. Lord Mance, Lord Collins and Lord Walker disagreed on this point but all the judges agreed that the appeal should in any event succeed by reason of Section 31 of the Civil Jurisdiction and Judgments Act of 1982 providing for the UK recognition of foreign judgments and by Argentina’s submission and waiver of immunity in the bond agreements.

The hedge fund purchased the bonds at little over half their face value and then pursued the Republic of Argentina for the return of their full principal value and interest in US federal court and ultimately obtained summary judgment on the bonds from a Federal Court in New York for over $284 million.

At the beginning of the 20th century state immunity was a doctrine of customary international law under which a state enjoyed absolute immunity from suit in the court of another state. The property of the state was also immune from execution. Gradually, UK legislation provided exceptions to the doctrine. Lord Phillips noted that the 1978 Act provides that a State is not immune as respects proceedings relating to a commercial transaction entered into by the State. The action in respect of which the hedge fund obtained judgment in New York federal court was a proceeding relating to a commercial transaction” within the meaning of section 3(1)(a).

Lord Mance did not think it was justified to treat the wording of Section 3(1)(a) as applying to a foreign judgment against a foreign state, which had long been recognized as a special area of private international law. In his view, Section 31 of the 1982 Act was the means by which Parliament had achieved for the first time a comprehensive treatment of the issue of state immunity in respect of foreign judgments.

Lord Collins (with whom Lord Walker agreed) pointed to the almost invariable use in international loan agreements and bond issues since the 1970s of clauses providing for submission to national jurisdiction and waivers of immunity. He preferred a narrow interpretation of the 1978 Act Sec. 3(1)(a). There was no policy reason to give it a wider meaning in the light of Sec. 31 of the 1982 Act and the widespread use of express waivers. . Lord Collins said that the natural meaning of section 31is that it requires recognition and enforcement of a foreign judgment against a foreign State the normal conditions for recognition and enforcement of judgments are fulfilled, and the foreign State would not have been immune if the foreign proceedings had been brought in the United Kingdom.