Arbitration clauses in sovereign debt instruments

Abstract

As long as absolute sovereign immunity closed national courts to sovereign creditors, arbitration rudimentarily filled the resulting gap in creditor protection. In the second half of the nineteenth century and prior to World War II, arbitration clauses in sovereign debt instruments were quite common. Once national courts started to hear sovereign debt cases, the need for such arbitration clauses declined. After World War II, these arbitration clauses became extremely rare. Modern sovereign debt instruments almost invariably submit to the jurisdiction of national courts in important financial centres. Today's sovereign bonds rarely contain arbitration clauses. Brazilian government bonds, which occasionally incorporate UNCITRAL arbitration clauses, are the exception. They include arbitration clauses alongside providing for the jurisdiction of Brazilian courts because Brazilian law prohibits submission to external courts. Arbitration clauses before the twentieth century The Jay Treaty of 1794 created the first mixed claims commission to deal with Britain's claims regarding ‘[d]ebts … which were bona fide contracted before the Peace’. It stipulated arbitration to settle debts incurred before the American Revolution, maritime claims, and the Maine boundary dispute with Britain. In the nineteenth century, arbitration clauses in sovereign debt contracts were quite common. A good example is Article 31 in the agreement to restructure Costa Rica's external debt in 1884. The debt restructuring of Entre Rios province likewise provided for arbitration on whether special types of claims had received adequate consideration, so as to avoid delaying the implementation of the agreement or risk non-acceptance. Lord Rothschild acted as sole arbitrator.