Skadden's Patrick Heneghan and Markus Perkams ask if arbitration can help Greek bondholders gain redress

Cynics would say that the legal sharks have already started circling the fall-out from the Greek sovereign debt restructuring. One law firm is reported to be already seeking German private investors in Greek bonds to pursue a class action-style investment treaty arbitration against Greece.

But the feared feeding frenzy which would have arisen were Greece to have exited the euro and re-introduced the drachma has not transpired – at least not yet. With the International Monetary Fund bolstering its funds, bond markets displaying increasing signs of schizophrenia as to whether austerity rather than Keynesian economics is the best way for countries to pull themselves out of the morass and the hopes of economic growth solving the problem already disappearing for another year, the comments by some at the time of the Greek haircut that the can had just been kicked down the road may well prove prescient. Over the last few weeks the yield on Spanish bonds has passed the crucial 6% mark where other European countries have sought bail out funds. With Spain potentially too big to bail, like some Carrie-esque horror movie, the euro sovereign debt crisis seemingly refuses to die.

So what are the prospects of recovering more of the debt owed via investment treaty arbitration for the holders of Greek sovereign debt who have refused to accept the haircut? While Greece has over 40 bilateral investment treaties, it has few with Western investor states, Germany being a rare exception. The first hurdle faced by German holders of Greek sovereign debt seeking to recover under the German-Greek investment treaty is the absence of any investor-state arbitration provision granting private investors a direct avenue for legal redress.

Instead, German holders of Greek sovereign debt will need to rely on the "most favoured nation" clauses in the treaty to argue that they should be afforded the very same protection of an investor-state arbitration provision afforded to investors in other states with investment treaties with Greece. Such arguments have not, in the past in any event, met with universal success.

Assuming that this jurisdictional hurdle can be overcome, German investors seeking to club together, as has been reported, will also need to persuade a tribunal to exercise jurisdiction in respect of any quasi-class action or mass claim. This would not be without precedent; 60,000 holders of Argentinean sovereign debt recently succeeded in doing so for the first time in Abaclat & Others v Argentina.

On liability, the investor claimants will need to be able to establish that the acts of the Greek Government – including the retrospective imposition of collective action clauses in Greek law-governed debt allowing a super-majority to bind all holders of a bond issue to the restructuring, and also seeking to limit the rights of bondholders to take legal action – were expropriatory, or at least unfair. This involves also showing that the acts actually caused the alleged loss, rather than, say, any intervening vote of a super-majority of bondholders accepting the haircut. If liability is established, investors will also need to show that they have suffered a loss as a result of the action complained about.

It may well be said against the investor claimants that, at the time of the alleged expropriatory or unfair acts, the value of their debt was not the outstanding amount owed but the market value of the debt, which was worth no more than the value of the restructured debt obligation, and most likely significantly less. A tribunal may have sympathy with that position, particularly where the claimant is not some unfortunate German pensioner but some so-called vulture fund that bought into the problem. And then there would be the challenges to and the successful enforcement of any award.

No doubt, given these hurdles, investors in Greek debt will consider the alternatives, such as a claim under the European Convention on Human Rights (ECHR) on the basis that their rights to property have been violated by the actions of the Greek Government. However, this route does not look straightforward either. Investor claimants would most likely first have to exhaust available local remedies and then endure lengthy proceedings before the already overstretched ECHR.

All this would make for an uncertain result, since it is far from clear that the ECHR would hold the Greek measures to be expropriatory. Were the investor claimants to be successful in establishing liability under the ECHR, this might prove to be nothing more than a pyrrhic victory; the ECHR has in the past given states a significant amount of leeway in assessing reasonable compensation for expropriatory acts.

It is likely that, whatever avenue is pursued, any investors seeking to bring claims in respect of the Greek debt restructuring, or indeed any other debt restructuring arising out of the eurozone crisis, will need to be in it for the long haul; Argentina restructured its debt in 2001 and investor claims continue to this day.

Whatever the hurdles, however, and given the runes, prudent owners of sovereign debt in European countries other than Greece are no doubt re-assessing, as part of their contingency planning, the way they hold such debts to maximise whatever investment treaty protection is available, thereby keeping potential avenues of legal redress open even if only to increase their bargaining position against beleaguered governments in due course.

For businesses considering entering contracts now with residents of states considered at risk, expressly providing in contracts for governing law and jurisdiction outside of the state at risk and for the payment obligation to be outside the state at risk, may well prove to be a prudent way of seeking to secure euro payment obligations.

It would also be prudent contingency planning for such businesses, and indeed any businesses which have existing contracts with entities in states considered at risk where there is a euro payment obligation, to consider whether their contracts are susceptible to investment treaty protection and what steps could be taken to structure the ownership of the relevant contracting entities to maximise what investment treaty protection is available.

The sharks may have to gaze longingly at the decks of the eurozone ship for a while longer. Prudent general counsel are no doubt already checking and double checking the legal life rafts, which should include investment treaty protection.

Patrick Heneghan is a litigation and arbitration partner and Markus Perkams an associate at Skadden Arps Slate Meager & Flom. The views expressed are the authors' and do not necessarily represent the views of the firm or its clients.