Injunctions in Sovereign Debt Litigation

Injunctions against foreign sovereigns have come under criticism on comity and enforcement grounds. We argue that these objections are overstated. Comity considerations are important but not dispositive. Enforcement objections assign too much significance to the court’s inability to impose meaningful contempt sanctions, overlooking the fact that, when a foreign sovereign is involved, both money judgments and injunctions are enforced through what amounts to a court-imposed embargo. This embargo discourages third parties from dealing with the sovereign and, if sufficiently costly, can induce the sovereign to comply. Nevertheless, we are skeptical about injunctions in sovereign debt litigation. They are prone to dramatic spillover effects precisely because they cannot reach their primary target, the sovereign government. Recent decisions in NML v. Argentina illustrate the way in which a court’s inability to compel compliance by the sovereign may lead it to impose dramatic and potentially unwarranted costs on third parties, turning traditional equitable analysis on its head

A People’s History of Collective Action Clauses

For two decades, collective action clauses (CACs) have been part of the official-sector response to sovereign debt crisis, justified by claims that these clauses can help prevent bailouts and shift the burden of restructuring onto the private sector. Reform efforts in the 1990s and 2000s focused on CACs. So do efforts in the Eurozone today. CACs have even been suggested as the cure for the US municipal bond market. But bonds without CACs are still issued in major markets, so reformers feel obliged to explain why they know better. Over time, a narrative has emerged to justify pro-CAC reforms. It relies on history and portrays CACs as novel solutions to previously-unappreciated coordination problems among bondholders. But this pro-CAC narrative is based on flawed premises. In this article, we trace the use of CACs in sovereign bonds during the 20th century. We show that CACs have been used for much of that time, although often in forms (such as trustee and collective acceleration clauses) that are no longer central to modern reform debates (which focus on modification clauses). Market participants have long been aware of CACs but did not view them as a necessary part of sovereign bond documentation. Indeed, we recount one episode in which sovereign debt was restructured without anyone seeming to notice that the relevant debt already included CACs. Contracts do not always include the optimal terms, and, at the margins, the sovereign debt markets might perform better if all bonds contained CACs. But if CACs are to be a central part of reform agendas, they should be defended on functional grounds rather than on contestable historical ones

Sovereign Debt and the “Contracts Matter” Hypothesis

The academic literature on sovereign debt largely assumes that law has little role to play. Indeed, the primary question addressed by the literature is why sovereigns repay at all given the irrelevance of legal enforcement. But if law, and specifically contract law, does not matter, how to explain the fact that sovereign loans involve detailed contracts, expensive lawyers, and frequent litigation? This Essay makes the case that contract design matters even in a world where sovereign borrowers are hard (but not impossible) to sue. We identify a number of gaps in the research that warrant further investigation

How Markets Work: The Lawyer’s Version

In this article, we combine two sources of data to shed light on the nature of transactional legal work. The first consists of stories about contracts that circulate widely among elite transactional lawyers. Surprisingly, the stories portray lawyers as ineffective market actors who are uninterested in designing superior contracts, who follow rather than lead industry standards, and who depend on governments and other outside actors to spur innovation and correct mistakes. We juxtapose these stories against a dataset of sovereign bond contracts produced by these same lawyers. While the stories suggest that lawyers do not compete or design innovative contracts, their contracts suggest the contrary. The contracts, in fact, are entirely consistent with a market narrative in which lawyers engage in substantial innovation despite constraints inherent in sovereign debt legal work. This raises a puzzle: Why would lawyers favor stories that paint them in a negative light and deny them a potent role as market actors? We conclude with some conjectures as to why this might be so. An earlier version of this paper was presented at the conference on Socializing Economic Relationships: New Perspectives and Methods for Transnational Risk Regulation, at the Centre for Socio-Legal Studies at the University of Oxford, April 2010

Differing Perceptions? Market Practice and the Evolution of Foreign Sovereign Immunity

The 20th century witnessed a transformative, “tectonic” shift in international law, from “absolute” to “restrictive” theories of sovereign immunity. As conventionally understood, however, this dramatic transformation represented only a shift in the default rule. Under absolute immunity, national courts could not hear lawsuits and enforce judgments against a foreign sovereign without its consent. Under restrictive immunity, foreign sovereigns were presumptively not immune when they engaged in commercial acts. We demonstrate that market practices undermine this conventional understanding. Using an extensive, two-century data set of contracts between foreign governments and private creditors, we show that contracting parties have long treated absolute immunity as akin to a mandatory rule, which they could not reliably change by contract. By contrast, we show that the Foreign Sovereign Immunities Act in the U.S. and the State Immunities Act 1978 in the U.K. — two statutes largely overlooked by international law scholarship — fundamentally reordered a global market for contracts. We explore why the conventional narrative, which relies on analysis of traditional legal materials, is at such odds with the “law on the ground.

The Relevance of Law to Sovereign Debt

The literature on sovereign debt treats law as of marginal significance, largely because the doctrine of sovereign immunity leaves creditors few potent legal remedies against sovereign borrowers. Although sovereign debts can indeed by hard to enforce, the goal of this Essay is to demonstrate that law plays a central, and constantly evolving, role in structuring sovereign debt markets. To list just a few examples, legal rules and institutions (i) decide when a borrower is sovereign, (ii) define the consequences of sovereignty by drawing (or refusing to draw) artificial boundaries between the sovereign and other legal entities, (iii) play some role in cases of state and government succession, and (iv) determine the extent to which the rules of sovereign immunity can be changed by contract. These legal rules and institutions are not set in stone; they evolve in response to the political, economic, and social forces that shape the market for sovereign debt

Customized Procedure in Theory and Reality

Contract theory has long posited that parties can maximize contract value by manipulating the procedural rules that will apply if there is a dispute. Beyond choosing a litigation or arbitration forum, parties can allocate costs and fees, alter pleading standards, adjust evidentiary and discovery rules, and customize nearly every aspect of the adjudication process. In time, this theoretical insight became a matter of faith. The assumption that contracts routinely alter procedural rules spawned debate over the normative implications of allowing parties to dictate procedure. Only recently have a few studies suggested that this debate may lack a firm empirical foundation. This Article presents a comprehensive picture of dispute resolution practices in commercial contracts, one that corrects for many of the limitations of the existing research and focuses on both binding and non-binding mechanisms. Parties do exercise autonomy in structuring the rules of adjudication, but they do so within a limited domain. Contracts almost always specify the governing law and routinely designate a litigation or arbitration forum, and a substantial minority allocate responsibility for attorney fees. In arbitration, parties go further, frequently allocating costs, imposing expertise requirements, and shaping decision-making dynamics (as by requiring multiple arbitrators). In neither forum, however, do parties expressly modify governing rules of pre-trial, trial, or arbitration procedure. The findings imply that it is premature to debate the normative implications of allowing parties to dictate judicial procedures, for contracts rarely employ the kinds of clauses that have provoked concern. Yet, the findings also call for a more complete account of procedural contracting—one that explains why parties do not more fully exercise their procedural autonomy

Toward A Theory of Precedent in Arbitration

Do arbitrators create precedent? The claim that they do not recurs throughout much of the arbitration literature. Instead, arbitration often is viewed as an ad hoc forum in which arbitrators do justice (at best) within the confines of particular cases. As an empirical matter, however, it is increasingly clear that, in some arbitration systems, arbitrators often cite to other arbitrators, claim to rely on past awards, and promote adjudicatory consistency as an important system norm. Much like courts, then, arbitrators can (but do not always) create precedent that guides future behavior and provides a language in which disputants, lawyers, and adjudicators can express and resolve grievances. This Article provides a theoretical foundation for understanding the conditions under which precedent will (or will not) arise in arbitration. It identifies three considerations that may account for the development of precedent across a range of arbitration systems: (1) whether the system is structurally conducive to the creation of precedent; (2) whether arbitral precedent benefits the parties by filling gaps in (or displacing) state-supplied law; and (3) whether arbitrators are likely to be viewed as legitimate producers of law within the relevant context. After explaining the relevance of these considerations, the Article explores how they might apply in different arbitration contexts and sets forth a research agenda capable of shedding light on arbitration not only as a mechanism for resolving disputes, but also as a mechanism for generating robust systems of privately made law

Piercing the (Sovereign) Veil: The Role of Limited Liability in State Owned Enterprises

Sovereign nations own more than ten percent of the world\u27s largest firms and use these ownership stakes to pursue economic, social, and political objectives unrelated to profit maximization. Sovereign nations also have unique powers and attributes that ordinary owners lack. Sovereigns do not need an owner\u27s control rights to direct entity behavior; they have the power to regulate. Sovereigns do not need an owner\u27s economic rights to extract value; they have the power to tax. And sovereigns do not need to hide behind the principle of limited liability, which protects owners of limited liability entities; they have sovereign immunity in both domestic and foreign courts. Despite these fundamental differences, neither courts nor legal scholars have seriously examined whether organizational law should distinguish sovereigns from other owners. This Article takes up that question, focusing on the law of veil piercing as applied to corporations and other limited liability entities owned by sovereign states. Its first contribution is to demonstrate that the principle of limited liability does different work for sovereign states than for ordinary shareholders. That principle\u27s primary function is to create a partition between the owner\u27s assets and those belonging to the entity. Because the partition yields important economic benefits, veil piercing is reserved for exceptional cases. But foreign states do not need organizational law to realize these benefits. The law of foreign sovereign immunity already protects the state\u27s assets in ways that mimic the protections of organizational law. By contrast, state owned entities rely on organizational law for asset protection. Put differently, in the sovereign context, organizational law mostly protects entities. In the United States , the law of veil piercing in this context derives from the Supreme Court\u27s seminal Bancec case. The Article s second contribution is to demonstrate that Bancec supports its clarified understanding of the relevance of organizational law. Indeed, Bancec was a reverse veil piercing case in which a creditor of a foreign state asserted a claim against a state owned firm. Bancec\u27s emphasis on the traditional asset protective function of organizational law must be understood in that context. Bancec does not stand for the proposition that foreign states should receive the same protections as ordinary shareholders . The Article closes by exploring implications of this analysis. Perhaps the most important (if counter intuitive) implication is that courts should be more receptive to traditional veil piercing claims, at least in a subset of cases