“Once a Trader, always a State”: The Federal Constitutional Court classifies Greek debt restructuring measures as acta iure imperii

Published: 16 July 2020 Author: Rohan Sinha

Between 1998 and 2010, the Hellenic Republic issued various sovereign bonds, which were subject to Greek law and traded as book-entry securities at the Athens stock exchange. These securities were registered in the Greek Central Bank’s securities settlement system and could be purchased by participants in the securities settlement system, upon which the participants became the holders and creditors of these bonds. According to Greek law, the participants could grant rights to those bonds to third-party investors, although the transaction by which those rights were granted was effective only between the parties concerned and expressly did not operate to the benefit or detriment of the Hellenic Republic.

In 2011, two investors from Germany acquired sovereign bonds issued by the Hellenic Republic through custodian banks in Germany which were accredited by the Greek Central Bank to participate in the securities settlement system. These sovereign bonds, maturing in March and August of 2012 respectively, were credited to the bank accounts of the German investors maintained with the custodian banks.

As a result of the Greek Debt Crisis, on 23 February 2012, Law 4050/2012 came into force. The law provided for the submission of a restructuring offer to certain holders of Greek sovereign bonds, by which the Greek State invited those holders to decide on proposed amendments to the terms and conditions of the bonds. Such an adjustment of the securities required a quorum representing 50 % of the total of the outstanding bonds concerned, and a qualified majority corresponding to two thirds of the participating capital. By this so-called “collective action clause”, decisions adopted by the required majority would be binding also on the minority, overriding any opposing legal or contractual provisions.

On 24 February 2012, the Hellenic Republic submitted a restructuring offer to the bondholders, whereby the issued bonds were to be replaced with new bonds of a lower nominal value. The offer was accepted by the required majority of bondholders, whose decision was binding on the two German investors, who had refused the offer. On 12 March 2012, the existing bonds were exchanged with new bonds in the participants’ accounts kept in the securities settlement system. The participating custodian banks implemented the restructuring measure by transferring the titles to the new bonds to the private investors.

On 11 December 2013, the two German investors instituted legal proceedings at the Regional Court of Osnabrück against the Hellenic Republic, claiming the return of the replaced bonds or alternatively compensation for the loss of value. The Court dismissed the application as inadmissible due to the principle of State immunity. Subsequent appeals were rejected by the Higher Regional Court of Oldenburg and the Federal Court of Justice.

The plaintiffs then filed a constitutional complaint before the Federal Constitutional Court, alleging a violation of their right to a lawful judge. They submitted that the Federal Court of Justice, deciding on the “highly contentious issue of the extent of immunity under customary international law” did not refer the matter to the Federal Constitutional Court, which is the competent court under the German constitution to decide on the existence and extent of a rule of international law. According to the plaintiffs, the Federal Court of Justice should have requested an opinion from the Federal Constitutional Court on whether there existed an exception to the customary rule of immunity when a State descended into the sphere of private law. In the plaintiffs’ view, it would have been for the Federal Constitutional Court to decide whether the principle “once a trader, always a trader” was a principle of international law.

In its decision of 6 May 2020, the Federal Constitutional Court rejected the complaint, holding that the Federal Court of Justice had merely applied an already well-established and recognized rule of public international law. The Federal Constitutional Court stated:

“It is a generally accepted rule of public international law that a State is, in principle, not subject to any foreign jurisdiction. However, the majority of States today follows a restrictive approach to immunity, according to which State immunity applies only to sovereign acts (acta iure imperii), but not to commercial transactions (acta iure gestionis).

This also corresponds to the jurisprudence of the Senate, according to which State immunity exists largely without restriction for acts that represent sovereign activities, but not (any longer) for the so-called acta iure gestionis.”

The Federal Court of Justice had held that the issuance of sovereign bonds by a State was an act iure gestionis whereas the debt restructuring measures were legislative actions by the State and thus qualified as acta iure imperii. The Federal Constitutional Court agreed:

“While the issuance of government bonds is largely considered a non-sovereign act, legislation is part of the generally recognized area of sovereign activity. An act iure imperii also exists if a State unilaterally imposes taxes and other levies on those subject to its jurisdiction.

On the basis of these assessments of the German legal system that is decisive for the delimitation [between acta jura imperii and acta jure gestionis], in the present legal dispute an act iure imperii is at issue. The subject matter of the legal dispute is the reduction of the applicants’ claims as a result of the compulsory exchange imposed by Greek law and the related failure to pay in full the originally owed nominal value of the government bonds issued and then compulsorily exchanged. Such a reduction of the nominal value by law is not available as an option to a private market participant and, in any case, belongs, at least with regard to bonds issued under the law of the issuing State, to the core area of sovereign activity. As a sovereign measure by a foreign State, the reduction of the nominal value by law is not subject to German jurisdiction.”

In support of its view, the Federal Constitutional Court relied on judgments of the European Court of Human Rights, the Court of Justice of the European Union and several domestic courts. While noting an isolated decision to the contrary and the opposing position in the literature, the Court did not engage with these views but simply stated:  

“This assessment is unshaken by voices in the jurisprudence of other States and in the literature, which claim that the legislature of the State issuing sovereign bonds cannot later amend the terms of contractual claims. Apart from the fact that they often argue on the basis of unclear premises, they do not base their view on a general conviction of a majority of States and therefore cannot establish a general rule of public international law.”

The decision of the Federal Constitutional Court closes the door on legal proceedings by private investors of Greek sovereign bonds in Germany, once and for all. The Court correctly distinguished between the issuance of sovereign bonds as an act iure gestionis and the legislative debt restructuring measure as an act iure imperii. After all, legislative action is a sovereign act par excellence.

By adopting this line of reasoning, however, the Federal Constitutional Court may have taken the easy way out, avoiding engagement with some notable counter arguments. For example, it did not explicitly address the complainants’ assertion that the rules of State immunity may not cover the present case.

As a result of their sovereignty, States enjoy immunity from the jurisdiction of foreign domestic courts. This concept of sovereign immunity rests on the legal principle of the equality of States (expressed in the maxim par in parem non habet imperium) and the principle of non-intervention in the internal affairs of other States. When States started increasingly to engage in commerce, there was a need to secure their accountability in commercial transactions and thus to limit their immunity. Accordingly, many States began to adhere to the doctrine of restrictive immunity, which provides that States enjoy immunity as regards governmental activity, but not where they engage in commercial activity. This led to the distinction between governmental acts – acta iure imperii – and commercial acts – acta iure gestionis – which today is followed by a large majority of States and thus can be considered customary international law.

The characterisation of an act as iure gestionis or iure imperii can be problematic at times. In particular, it is not clearly established whether States enjoy immunity if the breach of a commercial transaction results from an exercise of sovereign authority. Allowing for immunity in such a case would mean that a State could unilaterally alter or abrogate its contractual obligations by way of legislation without judicial oversight. This would contravene the object and purpose of the restrictive doctrine of immunity. To avoid this outcome, some authors have suggested the rule “once a trader, always a trader”, according to which a State’s entry into a commercial transaction irrevocably confers a commercial character on all acts related to that transaction.

The Federal Constitutional Court did not address this issue, but instead distinguished between the initial commercial transaction and the legal nature of the act affecting that transaction. This formalistic approach can be described as “once a trader, always a State” which reflects the understanding that a State’s ability to perform sovereign acts that enjoy immunity is not hindered by any underlying commercial relationship. However, the strict separation of the issuance of sovereign bonds and the debt restructuring measure fails to recognize their logical connection and potentially allows for the very conflict to arise which the restrictive doctrine seeks to prevent. It could be argued that in order for the doctrine of restrictive immunity to serve its purpose, it must extend exactly to cases like the present one. Otherwise, States will be able to breach their contractual obligations with impunity. The proponents of the rule “once a trader, always a trader” neither “argue on the basis of unclear premises” nor do they “not base their view on a general conviction of a majority of States”, as claimed by the Federal Constitutional Court. On the contrary, the rule has a clear basis in the restrictive doctrine of immunity. Furthermore, as the restrictive doctrine is the dominant approach in international law today, the rule “once a trader, always a trader” arguably  does reflect a general conviction of a majority of States and can therefore be considered a general rule of public international law.

By ignoring, rather than critically engaging with, the opposing rule of “once a trader, always a trader”, the Federal Constitutional Court missed the opportunity to advance the discussion of a contentious matter of public international law. In addition, it may have contributed to States being increasingly viewed as risky debtors.

Despite its lack of engagement with the rule “once a trader, always a trader”, the decision of the Federal Constitutional Court nevertheless seems correct. This is not because the rule does not exist, but because there was no contractual relationship between the private investors and the Hellenic Republic. The sovereign bonds were acquired from the Hellenic Republic not by the private investors but by the participants of the Greek Central Bank’s securities settlement system. The latter then transferred rights to the bonds to third party investors. The issuance of sovereign bonds by the Greek State did not create any direct commercial relationship between the State and the private investors who acquired the bonds on the secondary market from the participants in the Greek securities settlement system. The act iure imperii thus did not unilaterally dispose of the Greek State’s obligations created by the initial act iure gestionis. Therefore, even if the rule “once a trader, always a trader” did exist, it would not have applied in the present case between the Greek State and the private investors.

Category: State immunity

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  • Rohan Sinha is a research assistant at the Institute for Public International Law of the University of Bonn. He studied law at the University of Passau.

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