International Trade, Sovereign Default and Jurisdictional Immunities

Abstract

Environment of international trade is shaped by both economic and social factors. Legal framework may influence the trade by both those channels simultaneously by changing contract terms directly and by influencing conduct of parties to a transaction. This is the case of jurisdictional immunities – a legal institution with a potential of threatening the very fundaments of the free market economy: the sanctity of contracts. Shielding States from private claims abroad had been conceived as a means of protecting national dignity and preventing unjustified intrusion by domestic courts into foreign Sovereign’s internal affairs. Gradual increase of public activity in the economic field produced, however, a perverse effect. In case of international trade an immunity from jurisdiction may prevent a private party from enforcing its contractual rights against a foreign State. In terms of international financial transactions immunity veil prohibits lenders from recovering the debt. Originally this was perceived as a domestic problem of the State concerned (and of the private party thus suffering a loss). This changed, however, due to ever tighter global economic integration. Without entering into details behind the indebtedness crisis in the European Monetary Union , crisis eventually curtailed any doubts as to the “domestic character” of one’s fiscal stability, at least between members of a monetary integration zone. This, paradoxically, may be a counterbalance for the “immunity weakness”, as breach of a contract entails both direct and indirect (investors and the public) consequences for numerous market actors. On the contrary legal instruments that shield States from both their trading partners and lenders may render both areas of public activity even more interdependent. While considering any changes in this area one shall thus seek: - confidence-building measures, - to limit spillovers, - to stem capital outflow, - and to provide credible tools for crisis management. The question key question of why sovereigns repay their debts is a decisive factor in terms of severity of any confidence crisis.