Academic journal article Law and Contemporary Problems

Contracting for State Intervention: The Origins of Sovereign Debt Arbitration

Academic journal article Law and Contemporary Problems

Contracting for State Intervention: The Origins of Sovereign Debt Arbitration

Article excerpt

I

INTRODUCTION

Most models of contracting behavior assume that contracts are drafted with the expectation that their terms will be enforced, whether through legal or relational means. That assumption extends to contract terms governing the method of enforcement, such as arbitration clauses. According to theory, contracting parties keep promises to arbitrate either because they know courts will compel them to do so (or will enforce an arbitral award rendered in their absence) or because compliance is necessary to avoid some reputational or other extra-legal sanction. In other words, parties include arbitration clauses in their contracts because they want to arbitrate disputes and because they believe that a counter-party who has agreed to arbitrate will be unable or unwilling to renege on this promise.

In this article, written for a symposium on innovations on the sovereign debt markets, I describe how this account cannot explain the origins of arbitration clauses in contracts related to sovereign lending) Sovereign debt arbitration has been much in the news of late, primarily due to bondholders' efforts to arbitrate claims arising out of Argentina's 2001 default before the International Centre for Settlement of Investment Disputes (ICSID). (2) The reality, however, is that modern sovereign debt contracts generally choose litigation in national courts over arbitration. (3) But this was not always the case. In the first several decades of the twentieth century, arbitration clauses appeared with some frequency in sovereign debt contracts.

That these contracts would have addressed dispute resolution at all is somewhat surprising. As part I of this article explains, one might expect such terms to have originated sometime in the mid-twentieth century, when changes to the law of sovereign immunity made it feasible for creditors to obtain a judgment based on a sovereign government's ex ante consent to litigation or arbitration. During the previous era of absolute immunity, by contrast, states typically were immune from suit unless they consented at the time of the lawsuit itself. Since any dispute-resolution process would require the sovereign's ex post consent, there would seem little point to bargaining over such a process ex ante. More puzzling still, there is little evidence that sovereign borrowers voluntarily complied with their promises to arbitrate future disputes. Thus, a ready solution to the puzzle--that borrowers kept their arbitration-related promises to maintain their reputations as reliable transaction partners--appears inapt.

So what explains the use of arbitration clauses in these early-twentieth century contracts? Part II of this article draws on both original archival research and secondary-source material to offer a preliminary answer to this question. Tracing the routine use of arbitration clauses in sovereign loans to U.S. dollar diplomacy in Latin America and the Caribbean in the early 1900s, it argues that arbitration clauses often had little to do with facilitating an arbitration between lender and borrower. Instead, the clauses were designed to encourage, and at times enable, influential capital-exporting states to participate in resolving disputes arising out of sovereign loans. (4) Equally important, the clauses signaled to investors--at times, inaccurately--that important creditor states supported the loan and would view default with disfavor. In their earliest incarnations, then, these clauses had little to do with facilitating an actual lender-borrower arbitration. They were instead tools to signify and justify the projection of power by creditor states.

This article then briefly explores what these findings imply about the relationship between state actors and contract design. It is widely recognized, of course, that state-supplied law constitutes a set of implied terms that govern the content and manner of private exchanges unless the contracting parties agree otherwise. …

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