Preliminary Structural and Procedural Aspects of Iraq Debt Tribunal

This document was prepared for Jubilee Iraq by Jeff King, Research Fellow at the Centre for International Sustainable Development Law

1. Intro > 2. Authority > 3. Composition & Procedure > 4. Legal Standards

This paper addresses the key structural issues pertaining to a potential arbitral tribunal established for the purpose of evaluating the legality of Iraq’s various debt agreements.  The conclusions are preliminary and your feedback would be very welcome. Advice from experts in international law would be particularly appreciated.

1. Introductory Notes: The US-Iran Claims Tribunal

International dispute resolution is generally between states.  In such cases the role of national courts is highly limited, due to the doctrine of sovereign immunity and the doctrine of comity.[1]  Resolution of such disputes usually takes the form of negotiation, mediation, conciliation, arbitration or legal resolution before the International Court of Justice.  However national debt is typically owed to states, private creditors and multilateral institutions.  This renders more complex the role of traditional dispute resolution.

Arbitration is a commonly employed device for resolving commercial disputes between private parties.  It may also be used to treat so-called ‘mixed-claims’ between private creditors and public debtors.  The Iran-United States Claims Tribunal was established in 1981 to settle claims between Iranian and United States nationals arising from actions taken during the 1979 Iranian Revolution.[2] The arbitral tribunal was empowered to deal with claims between (a) nationals of the United States against Iran, (b) nationals of Iran against the United States, and (c) claims between the United States and Iran.  Its subject matter was “…debts, contracts (including transactions which are the subject of letters of credit or bank guarantees), expropriations, or other measures affecting property rights.”[3]  A total of 3,816 claims were filed before the deadline.  The first decision was rendered in 1981, and it continues to process claims to this day.  The result of this massive caseload is a well-developed body of jurisprudence and practice concerning public international law, mixed-claims and public and private law concepts blended together concerning commercial contracts, expropriation and debt agreements.

The Tribunal was established under unique circumstances.  It resulted from negotiations between the United States and Iran, in which each had significant bargaining power.  The United States had frozen nearly $12 billion in Iranian assets by Presidential order,[4] and Iran held several hundred American hostages.  Furthermore, several United States nationals had effected pre-judgment attachment of Iranian assets held in the United States, pending the outcome of litigation over breached contracts.  The parties resorted to the Government of Algeria for mediation, and eventually concluded the Algiers Accords on 19 January 1981.  The purpose of the accords was for Iran to repatriate the American hostages, and the US to lift the freeze order and terminate relevant litigation in US courts.  The Iranian government agreed to turn over the hostages in return for an executive act terminating all litigation over the assets, in favour of binding arbitration.  One billion dollars of the frozen assets was transferred to a security account, for the eventual payment of successful awards to US nationals.  This combination of political circumstances allowed the two states to nullify the terms of certain contracts, aggregate claims before one tribunal, and set the terms and procedure for the tribunal. 

The Iran-United States Claims Tribunal provides a useful model of the structure, procedure and genealogical legitimacy of a mixed-claims tribunal. It adopted the UNCITRAL Arbitration Rules, modifying them to suit the special requirements of the parties.

2. On What Authority Would the Proposed Iraq Tribunal be Established?

The Tribunal may be created through bilateral negotiations between Iraq and the creditor states or the states with whom the private creditors are nationals.  Iraq could maintain a position that it views the debt contracts undertaken with the Baathist regime as fundamentally contrary to the interests of the nation of Iraq, and that it does not view itself as legally bound by those debts.  It will not recognize foreign judgments enforcing contracts concluded under such circumstances.  Rather than repudiate the debts in their entirety (which  may well be within its legal and political power to do), Iraq would propose to create a single arbitral tribunal that will assess all debts according to one set of legal standards.  That tribunal will determine the measure by which Iraq in fact benefited from the transactions, taking into consideration the devolution of the regime’s assets to the post-Baath state of Iraq.  The creditor states must agree to terminate any domestic litigation in favour of submission of claims to the tribunal.

This is to take a position similar to the parties in the Iran-US Claims. The source of authority for the establishment of that Tribunal was political negotiation.  Political antagonism over US support for the Shah, radical change of circumstances in Iran constituting a force majeure, and sheer political fiat contributed to the result.  It must be recalled that this proposal is an alternative to outright repudiation.

To demonstrate its good faith, and assuming its capacity to do so, Iraq may place a certain portion of the debt money in an escrow account for payment of arbitral awards.  Furthermore it would adopt internationally recognized rules for the composition and procedure of the proposed tribunal. 

3. Composition and Procedure for the Tribunal

There are several model rules for the establishment of arbitral tribunals.  The proposed Iraq Tribunal could adopt a modified version of the United Nations Commission on Trade Law  Arbitration Rules (UNCITRAL Rules).[5]  These rules benefit from the well developed body of jurisprudence under the Iran-US Claims Tribunal.  Under such principles, each party to a dispute chooses an equal number of arbitrators, and those arbitrators further agree upon the selection of the remaining third. Iran chose three, the United States three, and three more were agreed upon by the selected arbitrators for a total of nine.  For the situation in which the arbitrators could not agree between themselves on other arbitrators, a provision provides that an Appointing Authority (person or institution) is designated to make the choice. 

Nine arbitrators provides for balanced decisions and various viewpoints, though it increases the risk of challenges to impartiality.[6]

One complication with the proposed Iraq Tribunal is that there would be several states-parties, rather than the usual two.   This problem could be remedied in one of two ways.  First, arbitrators that are agreeable to all creditors could be adopted for the creditor interests.  In the event that this option fails, individual chambers may be created for the settlement of claims between Iraq and nationals of a individual states or regional groupings of states,[7] with or without appeal to a grand chamber.  The options could be presented in this order during negotiations.

Thus the proposed Iraq Tribunal would be composed of nine arbitrators selected in accordance with slightly modified UNCITRAL Arbitration Rules.  Iraq would agree to be bound by all final awards, while creditor nations would forgo the option of litigation in another forum.  The appointing authority could possibly be the Secretary General of the United Nations, or the President of the International Court of Justice, or the Secretary-General of the Permanent Court of Arbitration.

The UNICTRAL Arbitration Rules contain detailed guidelines regarding arbitrator appointment, challenging arbitrators, rules of proceedings and evidence, costs, awards, applicable law and so on.[8]   Settlement of claims was encouraged at the Iran-US Claims Tribunal, resulting in a substantial number of settlement awards.

4. Applicable Legal Standards

The parties must decide beforehand what law will apply, or resort to the default standard provided in the arbitration rules.[9]  The law may be (1) the law as stipulated in the contract, (2) stipulated law on condition that international law will also be applied, or (3) only international law, including general principles of law as defined in the Statute of the International Court of Justice.  In most countries, public international law may be relevant under domestic law to the resolution of a legal dispute between nationals of different countries.  In the United States and the United Kingdom, the common law automatically recognizes customary international law as part of the law of the land.  Thus it is possible to condition the enforceability of private law agreements by reference to international law.  This is a highly acute concern where one party is a sovereign state, and where that state questions the legitimacy with which representative authority was exercised.  A similar rule applies in most civil law countries, in many cases under constitutional provisions.[10]  Thus the doctrine of odious debt, if established as customary international law, should be applicable to the proceedings regardless of the choice of law. 

The more difficult issue is whether the doctrine of odious debt constitutes customary international law, and thus be applied by the Tribunal.  At one time, arbitral decisions could be in broad reference to principles of justice and equity, and not rigidly regulated by legal principles.[11]  Presently, legal principles guide the arbitral process unless the parties stipulate otherwise.  Odious debt is far from settled law.  Thus Iraq may be faced with one of several choices.

First, it may stipulate unequivocally in the political accords that the doctrine of odious debt is applicable, with the precise contours of the doctrine to be determined by the Tribunal on a case by case basis.  This is to apply the doctrine by political act, but give creditor nations a role in defining it.  A general outline of the doctrine can be presented in the political accords establishing the Tribunal.  This option would likely meet with considerable opposition, since it does not propose settlement of the claims according to established law.  However if the creditors maintain that their debts were in fact for the benefit of the state of Iraq, they may agree to have the Tribunal apply the doctrine in the impartial manner proposed.  Furthermore Iraq may take the political position that it will not repay debts that were used to harm the state, regardless of whether international law recognizes its right to repudiate such debts. Arbitration allows the parties to shape the terms of settlement in this way.

Second, Iraq may petition the General Assembly, the Security Council or a specialised agency of the United Nations to submit a request for an ICJ Advisory Opinion on the legal status of the doctrine of odious debt under international law.  In the event of a positive finding, the specially constituted tribunal could apply the doctrine as formulated.  It would likely be politically possible only for the General Assembly to submit such a request, and that too would be fraught with difficulty.  Moreover, the ICJ may not render the decision sought by the debtor.

The third option is to constitute the Tribunal and have it decide upon the legality of the doctrine by reference to general international law.  The problem in this case is that the raison d’être for the Tribunal is the belief that the doctrine applies.  Thus if the Tribunal were to decide in its first interpretative decision that the doctrine did not exist in positive international law, subsequent proceedings would be pointless.

Under the circumstances, the first option would appear to be the best.  The political circumstances support such a move.  The resulting claims would establish an important body of international jurisprudence.  A strong argument can be made that such an approach would not affect the stability of future lending to stable representative governments who use the funds to further bona fide state interests.  It would merely discourage lending to dictatorial regimes, and promote creditor scrutiny of loans of an allegedly public nature.

The broad outline of the doctrine would be that a debt under international law is not enforceable if there is (a) an absence of the population’s consent, (b) an absence of benefit to all or most of the population, and (c) creditor awareness of both. The means for evaluating these terms may be established by the Tribunal.  Prima facie considerations and proposed standards are outlined in the CISDL study.[12]