Sovereign Debt as a Commodity: A Contract Law Perspective

Abstract

The ad hoc institutional configurations that facilitated the resolution of sovereign insolvency for over thirty years are fragmenting. In the absence of an acceptable alternative, the recent pari passu decision reveals the dangers of common law courts pressured to enforce contracts and paper over structural fissures in the market. The courts dismantled international law protections, common law checks and balances, gone beyond precedent to innovate remedies justified by interpreting a clause whose meaning and function was not clearly understood at the time by the contracting parties themselves. They have also strategically ‘invented’ an inter-creditor obligation to avoid sovereign immunity legislation. This imperils third party property protections and exposes the US clearing system to creditor remedies. This paper takes a step back from this dispute and discusses the unintended (and arguably long term) consequences of judicial intervention, from a contract law perspective. The paper argues that the challenges the courts face in the current context requires them to play an inadvertent, expansive ‘regulatory’ role. To fulfill this role they must ensure that creditors enjoy their property (debt) without constraints and assume away the externalities that arise from their unlimited enjoyment. In effect enforcement sustains the legal fiction that debt is a commodity. The legal recognition of this fiction obviates negotiated debt workouts, which by definition are premised on a suspension of this commodity form. This paper concludes with a discussion on the nature of legal indeterminacy, dispelling the idea that the possibility of enforcement in sovereign debt markets means we are closer to achieving the legal regime theorised as the neutral backdrop of competitive markets.