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Max Planck Encyclopedia of International Procedural Law [MPEiPro]

Sovereign Debt Litigation

Rodrigo Olivares-Caminal

From: Oxford Public International Law (http://opil.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved.date: 03 February 2023

Diplomatic missions — Immunity from jurisdiction — International financial law — Debts — Loans — Sovereignty — International courts and tribunals, procedure

Published under the direction of Hélène Ruiz Fabri, with the support of the Department of International Law and Dispute Resolution, under the auspices of the Max Planck Institute Luxembourg for Procedural Law.

A.  Introduction

For all the talk of sovereignty, countries and their governments are not omnipotent. They have limitations just like the citizens that compose them. Much like its citizens, a country will face pressures in paying all of its bills on time and in creating wealth through sound investments. Much of this is handled by fiscal policy, which is the discipline of what government revenues to collect, who to collect them from, and how to spend them. However much like an individual living day-to-day from a salary, fiscal policy has its limitations in that a government that has to spend in services what it raises in taxes and will never be able to save money for large expenditures of the sort that are sometimes required for necessary public investment.

Thus, countries, like corporations, turn to the financial markets for their financing needs. When countries use debt as a financing tool the debt is termed sovereign debt, and the country is known, in its status as a borrower, as a sovereign debtor. The lender, for its part, will be known as a creditor, and as will be seen, creditors to sovereign debtors come in all shapes and sizes, and can be either public or private in character.

This has advantages and disadvantages. Sovereign debt permits a country to make necessary investments for its future in the present time by borrowing the required moneys. It is expected that the sovereign will apply the funds that it receives from contracting long-term debt towards long-term investments; otherwise, it will run into balance of payments problems because it will have large new liabilities without a corresponding increase in government revenues to endow it with capacity to repay. Among the worst practices in sovereign borrowing is taking long-term debt and directing the funds towards covering operational deficits for a defined fiscal year. This creates what is known as an intergenerational problem, where future generations are left to pay for the liabilities incurred and unsustainable benefits enjoyed by existing generations. However, even following best practices, contracting debt always involves an element of risk.

Broadly speaking, sovereign debt is the debt incurred by a sovereign county in foreign or local currency from commercial lenders. It can be divided into two main groups: loans or securities (bonds or Eurobonds). At the same time sovereigns can contract debt with public creditors such as multilateral institutions like the International Monetary Fund (IMF) or from other nations. Debt sustainability is a key concept to understanding why a creditor may end up litigating against a sovereign debtor. Accumulation of debt beyond sustainable levels usually ends up with repayment problems that can lead to a default. Once a crisis of considerable magnitude affects the economy of a country, creditors may want to give serious consideration to their legal options for recovery.

One of the first known sovereign default cases is that of Dionysus I of Syracuse (circa 432–367 BCE), who defaulted after having borrowed from his subjects against promissory note-like instruments (Winkler, 1933, 21). Another well-known example is that of the ancient Greek city of Miletus, which secured a loan from Lysimachus in 282 BCE. The loan was repayable in annual instalments. The first payment was made on time but difficulties arose in connection with the second payment, aggregating 12 talents (the ‘talent’ was a unit of weight and was used to weigh gold or silver) to its total amount. The city of Miletus sought the assistance of another ancient Greek city (Cnidus) to avoid a default. The city of Cnidus was not satisfied by the financial position of Miletus and since a new loan could not be secured, Miletus resorted to a public offering that Cnidus endorsed, to encourage its citizenry to subscribe. This public (bond) offering enjoyed the benefit of a guarantee furnished by 75 citizens of Miletus selected by the city (Winkler, 1933, 24–25).

As has been noted, sovereign debt and sovereign default are not new concepts. Recent events in Greece have demonstrated that these crises and their subsequent defaults are not only limited to developing countries but can also occur in well-established, developed economies. In some instances, crises are recurring and becoming the norm (eg Argentina, Ecuador, or Belize). For these reasons, debtors and creditors need to know their options and be prepared in the face of distress situations.

In loan agreements and bond issuances, disruptions could amount to an ‘event of default’. Events of default are contractually agreed terms which stipulate circumstances that entitle the non-defaulting party to terminate and/or accelerate the agreement to require a borrower to repay the outstanding amount of the loan—although this can be reversed by a qualified majority. Typical events of default include non-payment of interest or principal, breach of representations, breach of covenants, cross-defaults, etc.

When an event of default occurs, a creditor is mainly faced with two alternatives: (1) either negotiate with the debtor to reach a restructuring agreement, which usually implies worsening the original terms of the credit; or, (2) pursue remedies against the debtor to collect the full face value of the credit in a court of law.

Regarding the former, the sovereign debtor can use two techniques to force a restructuring upon the creditors: the use of collective action clauses (‘CACs’); or exit consents.

10  By suing, creditors can prevent the use of these techniques, however, there is an important financial aspect that needs to be considered (Gulati and Weidemaier, 2018). Throughout the last decade during litigation against Argentina in New York, it has become evident that interests accrue at a different rate depending on whether the creditor has accelerated but not sued or whether there is a court order against the debtor. Sovereign debt financing documents normally specify that interest will accrue at the contractual rate until principal is paid in full—this applies in both scenarios, post maturity, and/or acceleration. On the contrary, if the creditor decides to sue, interest will accrue—post maturity and acceleration—at the New York statutory rate of 9% until judgment (according to New York Civil Practice Law and Rules (‘NY CPLR’) §5004) and then at the Federal Statutory rate of approximately 3% until payment (according to 28 United States Code (‘USC’) §1961). The rate of interest used in calculating the amount of post judgment interest is the weekly average one-year constant maturity (nominal) United States (‘US’) Treasury yield, as published by the Federal Reserve System. Table 1 below summarizes the pros and cons of suing versus not suing or delaying suit.

Table 1 




Interruption of the limitations period

Risk that the sovereign might use the limitation period as a defence

Prevent the use of CACs and Exit Consents

If CACs are used the bondholders can impose the will of the majority on a minority (and use exit consents to force the hand of holdout creditors)

UK: The rate of interest from judgment and until enforcement is fixed at 8%

US: Low accrual of interest from judgment and until enforcement (after judgment interest will be calculated at a floating rate based on 1-year US Treasury rates)

Interest will accrue on principal (post maturity or acceleration) at contractual rates (under New York law, interest on unpaid interests will accrue at the New York statutory rate of 9% until judgment)

11  This entry will focus primarily on debt securities litigation (bonds and Eurobonds) although references to loans are also made throughout. It aims to provide a step-by-step guide on private international law issues both, before (ex-ante) and after (ex-post) judgment, which are essential when contemplating litigation. The distinction between ex-ante and ex-post analysis, lies in the fact that the ex-ante issues deal with those aspects that need to be considered prior and in the process of obtaining a judgment while the ex-post analysis focuses on challenges in the enforcement of court judgments.

12  Although the purpose is to produce a dual New York State and English law analysis, emphasis will be placed on New York law, since the State of New York is the most common jurisdiction for sovereign litigation. In addition, relevant differences between New York law and English law will be highlighted and analysed. Sometimes, reference to a broader scope is made when the legislation is wide-ranging (eg the US or the United Kingdom (‘UK’), which include the State of New York and England, respectively). Also, the last part of the article analyses some relevant recent court decisions from different domestic and regional courts such as the European Court of Justice (‘CJ’) (European Union, Court of Justice and General Court) and the European Court of Human Rights (ECtHR). In the context of sovereign debt, there is no overarching international court that has jurisdiction on commercial claims.

13  The flow chart below (Diagram 1) summarizes the ex-ante and ex-post considerations in sovereign debt litigation that are analysed in this article; contrasted with the restructuring fallback option.

B.  Before the Claim: Key Considerations

1.  Avoiding the Claim: Certain Broad Considerations

14  As mentioned in the introduction, when an event of default occurs, it is not uncommon for the sovereign debtor to conduct a negotiation with the creditors to reach a restructuring agreement due to the lack of a statutory approach. In a debt restructuring processes, the sovereign debtor may try to use of CACs or exit consents to force a restructuring upon the minority of creditors. CACs are clauses that require the interaction of the bondholders to pass changes to certain reserve matters of the prospectus. There are four different types of CACs: (1) collective representation clauses; (2) majority action clauses; (3) sharing clauses; and (4) acceleration clauses. Within CACs, majority action clauses are the type of clauses that have been strongly pursued by the official sector and many academics, and they were effectively incorporated in bond issuances. Majority action clauses enable the amendment of any of the terms and conditions of the bonds, including the payment terms, if the required majority therein established is obtained.

15  Another option within the context of the restructuring is to convince creditors to participate in a voluntary exchange offer, which is sometimes achieved by using contractual enhancers or sweeteners. In the event that a high degree of participation is not achieved, the voluntary exchange offer can be combined with the exit consent mechanism. Exit consent is a mechanism which allows the sovereign debtor, in conjunction with the majority bondholders who grant their consent at the moment of accepting the voluntary exchange offer, to amend certain terms of the bonds that are being exchanged. The exchange offer is conditional upon the acceptance of a minimum threshold of creditors, which renders the amendments operative to make the defaulted bonds less attractive—in legal and financial terms—to the bondholders who are holding out and therefore forcing them to accept the exchange offer. If they refuse, they will be holding an impaired bond, which lacks some of the original contractual enhancements and protections. In any case, when participating in a debt restructuring process, whether voluntary or not, creditors need to know what alternatives they have in case the result is not what was expected.

2.  Where to Sue and Under What Law?

16  This section will focus on jurisdiction considerations and analyse the application of any exceptions—ie, sovereign immunity (or State Immunity as it is referred to under English law) and the act of state doctrine. State immunity will bar a court from hearing a case and passing judgment. In some cases, in order to decide if one of the parties has state immunity, a court will hear the case and rule only on this issue, and, act of state will bar a court from re-opening for questioning an act of a foreign state—it assumes the lawfulness of the act. Finally, it is worth mentioning that it is common practice in sovereign debt documents to include a waiver of immunity, a choice of a foreign jurisdiction, and enforcement of the proceedings (Committee on International Monetary Law of the International Law Association (‘MOCOMILA’), 2004, 6).

(a)  The Sovereign’s Own Courts

17  When default occurs—assuming that there is no grace period or if there is, that it has elapsed—a sovereign could pass or enact a law or issue an executive order declaring the situation a public emergency. For example, upon the Argentine debt crisis, the Argentine Congress passed Law 25,561 declaring a national public emergency, particularly in the social, economic, administrative, financial, and currency exchange areas. Greece, although a default was prevented, passed Greek Act no 4050/2012 of 23 February 2012 with a similar provision (Art 1 para 11). These acts or orders are unlikely to be justiciable so local courts are unlikely to rule against either the default or the legislative measure given their political nature. The possibility of biased domestic courts means that suing a sovereign in its own courts is not a viable option.

(b)  Foreign Courts (Courts Other than Those of the Defaulting Sovereign)

18  To resolve uncertainty, international loans and bond issuances usually provide for choice of law and for the sovereign borrower’s submission to a perceived fair, neutral, and expert forum in the jurisdiction of the selected governing law. Most often this results in the application of either English or New York State law due to the conceptual sophistication of financial law in these jurisdictions. According to Tennekoon, there are many issues that should be considered in order to decide which the proper law should be, these are: (1) the level of insulation (ie how effective the system is to reject the interference of other systems); (2) the certainty and result predictability in applying the chosen law; (3) the degree of party autonomy to avoid judicial interference; (4) conceptual sophistication; (5) market familiarity; (6) language (it is worth noting that the language of the financial markets is English); and (7) legal limitations on the choice of law (Tennekoon, 1991, 16 et seq). Therefore, most sovereign debt issuances are subject either to New York State law or English law. As will be analysed below, the applicable law is relevant when a sovereign is under distress because, depending on the applicable law, the alternatives of the debtor will be different.

19  Note that personal and subject matter jurisdiction as well as the acting jurisdiction’s limits on choice of law may restrict—although rarely—its assumption of jurisdiction, notwithstanding the specification of the acting jurisdiction’s law in the bond contract.

3.  Can the Debtor Sovereign Claim Immunity from Suit?

20  Both US law and English law allow sovereign or state immunity from jurisdiction or adjudication and thereby from attachment and execution in some circumstances. English law uses the term ‘state immunity’ for sovereign immunity, and ‘immunity from jurisdiction’ for immunity from adjudication, but this article will follow the American conventions. Although the focus is on New York (US, if the legislation is of federal nature) and English law, it should be noted that other countries have enacted acts de-immunizing state immunity (eg the Singaporean State Immunity Act 1979; the Pakistani State Immunities Ordinance 1981; the South African Foreign States Immunities Act 1981; the Canadian State Immunity Act 1982; or, the Australian Foreign States Immunities Act 1985).

21  Ever since the full entry into force of the United States Foreign Sovereign Immunities Act (1976) (‘FSIA’) (28 USC §1602 et seq), US law has required sovereigns to specially plead their immunity as an affirmative defence (House Report No 94-1487, 1976, 17). Sovereigns, their political subdivisions, and their instrumentalities which successfully plead immunity are granted blanket immunity from US court jurisdiction and from attachment and execution of US court judgments (28 USC §§1604 and 1609) with a few exceptions (28 USC §§1605–7, 1610, and 1611).

22  FSIA §§1605 to §1607 list two exceptions to immunity from the jurisdiction of the US courts which are of particular relevance to loan and bond issuances: (1) waiver of immunity (28 USC §1605 (a) (1)); and, (2) acts performed in connection to commercial activities. The waiver can be explicit, such as through treaties of friendship, commerce and navigation (House Report No 94-1487, 1976, 9), or through agreements between the parties. Even, the waiver can be by implication, which is interpreted in light of the circumstances (see eg Creighton Ltd v Government of State of Qatar, 1999). Courts have found implied waivers where: (1) a foreign state has agreed to arbitration in another country; (2) a foreign state has agreed that the law of a particular country should govern a contract; or (3) a foreign state has filed a responsive pleading in an action without raising the defence of sovereign immunity (House Report No 94-1487, 16–17).

23  Generally, obtaining a loan or issuing a bond is not protected by sovereign immunity under the second exception from immunity for claims arising out of the sovereign’s commercial activities (28 USC §1603 (d)). While the applicability of the commercial activities exception is generally contingent on the existence of a nexus connecting the activity to US territory (28 USC §1605 (a) (2)), the Supreme Court of the United States (‘SC’) ruled in Republic of Argentina v Weltover, Inc (1992) that Argentina’s bond issuance and unilateral extension of its payment date fell within the FSIA immunity exception (28 USC §1605 (a) (2)) because (1) such bond rescheduling was primarily a private commercial activity of a foreign state; and (2) that such activity had ‘a direct effect in the United States’, given that the US was designated as the place of performance for Argentina’s ultimate contractual obligations despite the bondholders’ citizenship as foreign corporations. In Verlinden BV v Central Bank of Nigeria (1983), the SC expressly stated that the FSIA permits ‘a foreign plaintiff to sue a foreign sovereign in the courts of the United States, provided the substantive requirements of the Act are satisfied’ (at para 2).

24  Under the UK’s State Immunity Act 1978 (‘SIA 1978’), the immunity of a State refers to immunity from jurisdiction but also to immunity from enforcement and other procedural privileges (sec 13 SIA 1978) and the courts must give effect to the immunity conferred even if the State does not appear in the proceedings in question (sec 1 (2) SIA 1978). Only foreign states, heads of state, and governments and government departments are eligible for state immunity (sec 14 (1) SIA 1978). The relevant exceptions under the SIA mirror those available under US law: the foreign state is not immune (1) if it has submitted to UK court jurisdiction (sec 2 (1) SIA 1978; or, (2) if the proceedings relate to commercial activities or consequences of a contract linked to the UK. A difference of the FSIA is that immunity cannot be waived by implication: ie it has to be expressly waived (FSIA 1978 §2 (3) (a)–(b)). However, Mann (Mann, 1984, 109) and Wood (Wood, 1980, 100) note that under the SIA, the objective test relating to the commercial nature of the transaction includes acts of sovereignty such as buying shoes for the army. In other words, States are not entitled to immunity in cases where the breach of contract arises from an act done in exercise of its sovereign authority (Mann, 1984, 109).

4.  Personal and Subject Matter Jurisdiction

25  After overcoming the hurdle of sovereign immunity, creditors must demonstrate that the court has personal jurisdiction (or power over the sovereign), and subject matter jurisdiction (or power over the claim), when a sovereign is sued.

(a)  Personal Jurisdiction

26  Statutory and constitutional limits on personal jurisdiction must be met to support personal jurisdiction over a defendant in a US court. US case law on personal jurisdiction is derived from the due process requirements of the Fourteenth Amendment to the constitution. The SC has held that personal jurisdiction is proper only if sufficient minimum contacts so as not to offend due process and substantial justice exist between the defendant and the state of the forum court (International Shoe Co v Washington, 1945). Extensive contact with a state will generally lead to personal jurisdiction. Since most US states in their long-arm statutes assume the full extent of jurisdiction available to them under federal law, personal jurisdiction analysis under federal law generally yields the same result under state law. According to NY CPLR §302 (a) (1), a court may exercise personal (long-arm) jurisdiction over any non-domiciliary, who in person or through an agent ‘transacts any business within the state’.

27  However, lacking extensive contacts supporting such broad adjudicative authority, courts may still possess specific jurisdiction, provided that the defendant has sufficient minimum contact with the forum state, the defendant purposefully availed itself of the forum state (World-Wide Volkswagen Corp v Woodson, 1980), and that suit in that forum be reasonably foreseeable to the defendant given its contact with the forum (Asahi Metal Industry Co Ltd v Superior Court of California, 1987). Sufficient minimum contact with the forum includes the situation in which a US state is the place of performance specified in a contract and when the US forum is designated in a contract’s choice of law clause. For an act to suggest that a defendant state has purposefully availed itself to a forum, evidence is needed that the defendant directed some intentional act towards that forum state. It includes the conduct of business within a state (Hanson v Denckla, 1958), because by the act of conducting this business a defendant state derives benefits from the law of that state (J McIntyre Machinery Ltd v Nicastro, 2011). Personal jurisdiction over the defendant must be fair without imposing the unreasonable burdens of litigation in an inconvenient forum state (World-Wide Volkswagen Corp v Woodson), given due process concerns.

28  When an action arises out of sovereign debt issuance, specific personal jurisdiction over that sovereign state is likely to exist (subject to the existence of sovereign immunity). In Republic of Argentina v Weltover Inc, the SC recognized that by issuing negotiable debt instruments denominated in US dollars and payable in New York and by appointing a financial agent in that city, ‘Argentina purposefully availed itself of the privilege of conducting activities within the United States’. Note that exercise of personal jurisdiction is authorized by proper service in the US (Rule 4 Federal Rules of Civil Procedure (‘FRCP’)) and in England and Wales (Part 6 Civil Procedure Rules), and that it is common for sovereign debtors to appoint a service agent in the jurisdiction of the loan or bond contract’s governing law.

(b)  Subject Matter Jurisdiction

29  With respect to subject matter jurisdiction, the US federal courts have limited jurisdiction. They can only hear cases within the narrow areas bestowed upon them by the Constitution (Art III, Section 2) and Congress. Two paths to federal subject matter jurisdiction include diversity jurisdiction and federal question jurisdiction. Diversity jurisdiction exists where claims are between parties with different citizenships, meaning that all defendants must be from different states or countries than all plaintiffs in the case (28 USC §1332); the matter in dispute exceeds the sum or value of US$75,000 (exclusive of interest and costs). The diversity jurisdiction treats all non-US parties as if they possessed the same citizenship, and it cannot entitle courts to hear actions by foreign plaintiffs against another foreign state (see Mossman v Higginson, 1800). The federal question jurisdiction covers matters ‘arising under’ the Constitution, treaties or other federal laws (28 USC §1331), such as the FSIA, which codifies the standards governing foreign sovereign immunity as an aspect of substantive federal law (see Verlinden BV v Central Bank of Nigeria). FSIA §1330 (b) provides for personal jurisdiction over sovereigns and in most instances, this will grant federal subject matter jurisdiction over suits against sovereigns (see Shapiro v Republic of Bolivia, 1991; Texas Trading & Mill Corp v Federal Republic of Nigeria, 1981).

30  In contrast, US state courts are courts of general subject matter jurisdiction. According to New York Business Corporation Law §1314 (b) (4), they can hear all claims excepting most tax, bankruptcy, and trademark matters, provided they possess personal jurisdiction. New York statutes specifically grant state court subject matter jurisdiction over (1) foreign corporations in actions brought by New York residents (including New York corporations); (2) in actions brought by non-New York residents (including foreign corporations, if claims relate to breach of contracts made or performed in New York); or, (3) if the defendant is a foreign corporation doing business or authorized to do business in New York (see New York Business Corporation Law §1314). In accordance with New York General Obligations Law §5-1402, New York state courts assert subject matter jurisdiction over foreign states in actions arising out of contracts valued at one million US dollars or more, provided the sovereign has submitted to New York jurisdiction. No New York statute expressly limits the subject matter jurisdiction over foreign states—as distinct from foreign governmental corporations (Ryan Jr, 1984, 176). However, given that claims against sovereigns are unavailable unless sovereign immunity is waived, and given that the FSIA provides for federal jurisdiction where sovereign immunity is waived, even when such claims are filed in state courts, parties may remove the case to the nearest federal court sitting in the same state because the claims arise under federal law.

31  Under UK law, if a defendant is domiciled in England, which is common practice in sovereign financing as sovereign issuers usually appoint an agent for service of process in the jurisdiction, English courts will have jurisdiction over the dispute and it will not be open to the defendant to argue that the case should be determined by the courts of a different jurisdiction.

32  However, it is also relevant to assess whether it is a non-European Union or a European Union (‘EU’) defendant. Regarding the former, and assuming that there is no agent for service in the jurisdiction, English Courts would have jurisdiction over a defendant who is domiciled outside the EU if the defendant can be served with the claim form (while) in England, even if only visiting (eg doing a bond issuance roadshow or simply meeting with creditors). A possible defence is to argue that the court should not exercise its jurisdiction if there is a more appropriate forum, ie the doctrine of forum non conveniens. If the defendant cannot be served while in England, the claimant can still obtain permission from the English Courts to serve notice outside the jurisdiction. Regarding the latter, under the Recast Brussels Regulation, English Courts have jurisdiction to determine a dispute involving a defendant that is domiciled in an EU member state if: (1) the parties have entered into an agreement conferring exclusive jurisdiction to the English Courts; and, (2) the obligation which is the subject of the dispute was to be performed in England and Wales.

5.  Are There Other Defences to Suit? The Doctrines of Act of State and Comity

(a)  Act of State Doctrine

33  The act of state doctrine precludes the courts of the US and UK from inquiring into the validity of the public acts of a recognized foreign sovereign power which have been committed within its own territory (see Underhill v Hernandez, 1897; Banco Nacional de Cuba v Sabbatino, 1964 (‘Sabbatino’); M Salimoff & Co v Standard Oil Co of New York, 1933; Frazier v Foreign Bondholders Protective Council, Inc, 1953; Holzer v Deutsche Reichsbahn-Gesellschaft, 1938).

34  The application of the act of state doctrine necessitates a case by case analysis. This is based on the sensitivity of foreign policy given the legal and political issues involved. The SC argued in the Sabbatino case that:

[i]f the act of state doctrine is a principle of decision binding on federal and state courts alike but compelled by neither international law nor the Constitution, its continuing vitality depends on its capacity to reflect the proper distribution of functions between the judicial and political branches of the Government on matters bearing upon foreign affairs. … It is also evident that some aspects of international law touch much more sharply on national nerves than do others; the less important the implications of an issue are for our foreign relations, the weaker the justification for exclusivity in the political branches (Sabbatino, s VI).

Generally, there are two prerequisites: (1) that the sovereign’s action is taken within its own territory; and (2) that the application takes place within the sovereign’s own territory (§41 Restatement (Second) Foreign Relations Law of the United States 1965). Typically, illegality of a sovereign’s act under its own law does not prevent application of the act of state doctrine, as was determined in Banco de España v Federal Reserve Bank of New York (1940).

35  In Alfred Dunhill of London Inc v Republic of Cuba (1976), the SC held that purely commercial acts of sovereigns would not be afforded act of state doctrine protection. Consequently, the act of state doctrine will rarely prevent courts from inquiring into the validity of a sovereign’s attempts to force refinancing of its obligations to sovereign bondholders. In Libra Bank Ltd v Banco Nacional de Costa Rica (1983), the US District Court for the Southern District of New York considered whether the act of state doctrine required recognition of a Costa Rican Central Bank resolution restraining external payments in foreign currencies, and thus whether the resolution would protect a Costa Rican bank subject to that resolution from an action to collect brought by an English corporation as agent for 16 banks. The appeals court rejected the act of state doctrine defence, holding that the situs of the debt owed was the US, given that (1) Banco Nacional had consented to jurisdiction in New York; (2) the loan agreement was construed under New York law; (3) payments were due at a New York bank; and (4) Banco Nacional had US$2.5 million in various New York bank accounts at the time the decrees were entered (at 881–82).

36  In the UK the position with respect to the act of state doctrine is similar to the US. Fox notes that the main difference is that in the UK the act of state doctrine operates as a defence to litigation, while in the US it operates as a defence but may also be used as a ‘basis for a substantive remedy’ (Fox, 2002, 484).

(b)  Comity

37  Comity can be understood as the courteous mutual recognition by nations of the laws and customs of other nations. It is important to stress that both in the US and UK the legal doctrine of comity recognizes and enforces other jurisdictions’ legal decisions as a matter of courtesy, or based on the need for reciprocity, but not as a matter of law.

38  Comity is similar to the act of state doctrine in that it recognizes the legislative, judicial, and executive actions of foreign sovereigns. However while act of state doctrine extends recognition of foreign sovereign actions even when such recognition may conflict with US or UK law and public policy, comity only selectively extends recognition to those legislative, judicial, and executive actions of sovereigns that conform to current US and UK law and policy.

39  In Libra Bank Ltd v Banco Nacional de Costa Rica (1983), Banco Nacional raised comity as a defence but the US District Court for the Southern District of New York rejected it on the grounds that the Costa Rican Central Bank resolution ordered the confiscation of property without compensation, and such an action is repugnant to the spirit and letter of the US Constitution. Note that in Allied Bank International v Banco Credito Agricola de Cartago (1984), a case similarly based on Costa Rican payment restraints, comity and act of state protection were similarly denied. Buchheit notes that the comity defence may still be available in US court actions to recover on debt obligations whose payment has been interrupted by a foreign government moratorium or standstill (Buchheit, 1987, 103).

40  Table 2 below summarizes the relevant doctrines applicable to sovereign debt litigation, ie state immunity, act of state, and comity comparing and contrasting their purpose, effect, and exemptions.

Table 2 

Relevant Doctrines Applicable to Sovereign Debt Litigation: Purposes, Effects, and Exceptions





State Immunity

Shield the sovereign and its agents from jurisdiction

Lack of Jurisdiction

Commercial Activity

Act of State

Shield the laws of a foreign state from external scrutiny

Restrain courts from inquiring into the validity of the sovereign state’s actions

Extraterritorial Effects


Recognizes a foreign state government action with effects beyond its jurisdiction

Validate a foreign action within the foreign territory

Inconsistency with US/UK law and policy

C.  After the Claim: Key Considerations

1.  Following Judgment in Creditors’ Favour: Attachment of Property for Execution of Judgments

41  Assuming the creditor is able to bring suit, the court may grant the creditor a judgment for the payment of the balance owed under the loan or bond. Several remedies are available to a successful creditor. Attaching property is one such remedy which is necessary to prevent the sovereign debtor from removing property before the granted judgment can be executed through levying upon the debtor’s property. The behaviour of the Argentine Government in the recent default crisis is illustrative as it has taken every conceivable step to remove property from the reach of its creditors. For example, Central Bank reserves that were deposited with New York banks have been withdrawn; funds of the Banco Nación—the national bank—that were in their New York branch have been repatriated; salaries of government employees abroad are paid into deposit accounts in Argentina or the money was sent via the so-called diplomatic bag, which enjoys immunity (Diplomatic Courier and Bag); the presidential airplane avoided landing in countries where bondholders have asked for garnishments, such as Germany; or, the Frigate Libertad, also avoided certain ports (Rebossio, 2004).

42  Though most of the debtor sovereign’s property is located in the debtor’s jurisdiction, the domestic powers of the sovereign debtor may obstruct execution of the court judgment, while if the creditor attempts to execute the judgment in, say, New York or England and Wales, the advantage is impartiality of the courts and predictability. Creditors have on many occasions sued sovereign debtors and sought to enforce judgments in these jurisdictions.

43  The NY CPLR allows enforcement of money judgments—or assistance for enforcement—through: (1) restraining orders before or after judgment (NY CPLR §5229 and §5222), (2) subpoenas for disclosure (NY CPLR §5223) or for persons and documents (NY CPLR §5224); (3) proceeding against a third party to require payment of debts owed to the judgment debtor (NY CPLR §5227); (4) the appointment of a receiver of property (NY CPLR §5228); and, (5) execution of property (NY CPLR §5230).

44  New York law provides for orders of attachment with notice (NY CPLR §6210) or without notice (NY CPLR §6211 (b)) to be granted before a New York judgment against property of the debtor in circumstances including when the defendant attempts to assign, dispose of, encumber, secrete, or remove it from the state with intent to defraud his creditors or frustrate the enforcement of a judgment rendered in a plaintiff’s favour whether the judgment is from a US court or any other court whose judgments are entitled to recognition under US law.

45  Some assets of sovereign states cannot be attached because they enjoy statutory immunity from the processes of execution (injunctive relief and execution). However, both the US and the UK—there is also a European Convention on State Immunity (1972)—distinguish between property intended for commercial purposes and that designated for sovereign or official functions (Schreuer, 1998, 145). Due to the increase of commercial affairs between countries, a distinction between acts of government (acta jure imperii) and acts of a commercial matter (acta jure gestionis) has developed and the sovereign immunity principle has become restrictive in the US and the UK through the FSIA and SIA, respectively. The sovereign immunity principle not only applies to the State itself but also to the sovereign of the State in his public capacity, to the government of the State, and any department of its government. This immunity protects a foreign State not only in direct proceedings against it in personam but also in indirect proceedings against property which is in its possession or control or in which it claims an interest. Details on assets of a sovereign that creditors commonly attempt to attach follow below.

(a)  Diplomatic Missions and Embassies

46  Though diplomatic missions may be easy for creditors to find, they enjoy immunity under US and UK law through interpretations of the FSIA and SIA, respectively. Both nations are signatories of the Vienna Convention on Diplomatic Relations (1961), which in Article 22 (3) expressly states that ‘[t]he premises of the mission, their furnishings and other property thereon and the means of transport of the mission shall be immune from search, requisition, attachment or execution’ (Premises of Diplomatic Missions). The same applies to consulates and special missions, according to Article 31 (4) Vienna Convention on Consular Relations (Vienna Convention on Consular Relations (1963)) and Article 25 (3) New York Convention on Special Missions of 1969, respectively (Immunities, Special Missions).

47  This notwithstanding, the situation of other assets—such as the bank accounts of the diplomatic mission—is not very clear. The broad phrasing of the New York Convention on Special Missions of 1969 extended immunity to ‘other property used in the operation of the special mission’, giving rise to contrary jurisprudence under the FSIA and the SIA with regard to the living quarters of diplomatic staff (see United States v County of Arlington, Va, 1 February 1982, 669 F 2d 925 (4th Circuit), cert denied, 459 US 801 (1982), and United States v County of Arlington, Va (17 March 1983) 702 F 2d 485; on the contrary, see Intpro Properties Ltd v Sauvel, 1983). Much of the jurisprudence holds that the immunity granted to certain assets by the Vienna Convention on Diplomatic Relations is not exclusive, and that in principle it extends to immunizing diplomatic bank accounts. In the UK, in Alcom Ltd v Republic of Colombia (1984) the House of Lords interpreted the SIA to grant immunity to foreign sovereign bank accounts, unless the money in the account is clearly earmarked for more than incidentally commercial purposes. This substantively prevents attachment of bank accounts in the UK while, as result of the Ambassador’s certificate required in sec 13 (5) SIA, the procedure of enforcement against any state-owned bank accounts is rendered extremely difficult (Schreuer, 1998, 155).

48  Assets excepted from immunity should include those that were expressly assigned as collateral in the event of a condemnatory judgment deriving from the sovereign actions iure gestionis, where such actions might appropriately have been undertaken by private individuals instead of sovereigns (Ramallo, 2000). Moreover assets are not excepted from attachment where the sovereign has waived its diplomatic immunity (Immunity, Diplomatic), as in the case of Argentina upon its default in 2001–2002 (Kanenguiser, 2003).

(b)  Central Bank Reserves

(i)  Central Bank Reserves under US Law

49  Almost every country in the world has some institution that serves as its central banking authority, usually designated or recognizable as a central bank. The primary functions of such a central bank are the custody of cash reserves for commercial banks and the government and the management of the nation’s reserves of international currency. As noted by Patrikis, central banks tend to invest a significant part of these reserves in foreign currency obligations. A large number of central banks prefer to invest in the US because the US dollar is a reserve currency and a vehicle currency (a currency used to denominate international trade and capital transactions and the US financial market is large and relatively stable) (Patrikis, 1984, 89). In the late 1970s and early 1980s, as result of well publicized cases against Iran (Chase Manhattan Bank v State of Iran, 1980) and Nigeria (Texas Trading & Milling Corp v Federal Republic of Nigeria and National Am Corp v Federal Republic of Nigeria) and with the enactment of the FSIA, creditors realized that foreign central banks hold substantial assets in the US and become aware that they might be attachable.

50  For the central bank’s property to be immune from execution and attachment under the FSIA, three requirements must be met: (1) the sovereign entity must qualify as a central bank or a monetary authority; (2) the relevant property must be held for the central banking authority’s own account; and, (3) there must be no waiver of immunity. Under the FSIA, the status of central bank as an ‘agency or instrumentality’ of a foreign sovereign determines whether the central bank can: (1) incur obligations on behalf of the sovereign; and, (2) claim sovereign immunity (Blair, 1998, 376). Regarding FSIA §1603 (b), in S & S Machinery Co v Masinexportimport (1983) it was established that state-owned central banks are included in the FSIA’s definition of ‘agency or instrumentality’ of a foreign state. However, where central banks are privatized or multinational, it is far from clear that they are ‘instrumentalities’ of foreign states. In the opinion of the Working Group of the International Litigation Committee of the Section of International Law and Practice of the American Bar Association, central banks are one category of entities that often does not fit the majority owned rule (Working Group of the International Litigation Committee of the Section of International Law and Practice of the American Bar Association, 2001, 516, fn 88). US courts generally accept the interpretation that private central banks are organs of the foreign state and thus qualify for immunity under the first part of FSIA §1603 (b), as established by the Iran-US Claims Tribunal in the Hague in Bank Markazi Iran v Federal Reserve Bank of New York (1999). The Federal Reserve Bank of New York (‘FRBNY’) proposed several tests advocating a departure from the organ theory in support of the conclusion that the FRBNY is a distinct entity with its own legal personality. Some of these tests include: (1) ownership structure; (2) responsibility for the appointment of the directors; and (3) responsibility for the day-to-day operations (test of ‘agency’ under the US Administrative Procedure Act). In addition, it was stressed that the fact that the FRBNY is subject to public regulation and supervision does not imply ‘dependence’ or ‘control’. Regarding multinational central banks, US courts have developed the ‘pooling’ concept whereby the ownership interests of more than one foreign government may be combined (ie a majority interest owned by a single foreign state is not required) to reach the majority ownership required by FSIA §1603 (b) (2).

51  An interesting recent case that provides a ringing endorsement of central bank immunity, is the decision by the US Court of Appeals for the Second Circuit in NML Capital Ltd v Banco Central de la Republica Argentina (2011, at para 19–20). NML Capital was seeking to attach funds held in the Argentine Central Bank’s (‘BCRA’) account at the FRBNY on the theory that those funds were attachable interests of the Republic of Argentina. The Court of Appeals reversed the District Court’s decision and held that the funds in BCRA’s account were immune from attachment pursuant to FSIA §1611 (b) (1). Argentina and the interested non-party-appellant BCRA appealed the orders of the US District Court for the Southern District of New York granting motions of plaintiffs/appellees EM Ltd and NML Capital Ltd to attach funds held in BCRA’s account at the FRBNY on the theory that those funds are attachable interests of Argentina. The judgment of the Court of Appeals stated that

[b]ecause BCRA’s sovereign immunity over the FRBNY Funds has not been waived and the FRBNY Funds are property of BCRA held for its own account under 28 U.S.C. § 1611(b)(1), we hold that the FRBNY Funds are immune from attachment and restraint. The District Court therefore erred in concluding that it had subject-matter jurisdiction to adjudicate a suit for attachment and restraint of the FRBNY Funds (NML Capital Ltd v Banco Central de la Republica Argentina, 2011, sec D).

52  This case clearly stated that immunity provided to central bank assets in the FSIA does not depend on whether the central bank is ‘independent’ from the parent state. Rather, the Second Circuit court held that the immunity depends only on whether the assets are used for ‘central banking functions’ (NML Capital Ltd v Banco Central de la República Argentina, 2011).

53  Another interesting example of special immunity is presented by the same actors in Switzerland, in an attempt of sequestration on central bank assets deposited with the Bank for International Settlements (BIS). In NML Capital Ltd/EM Limited v Banco Central de la República Argentina (2010) the claimants alleged that ‘invoking immunity was inappropriate or abusive’, since Argentina was abusing BIS immunity to make its assets inaccessible to its creditors. The creditors also put forward a right to a fair trial argument on the basis of Article 6 (1) European Convention on Human Rights (‘ECHR’). The BIS responded that: (1) the BIS immunities stem from its status as an international organization and is protected by absolute immunity without distinction between public (iure imperii) and/or commercial (iure gestionis) nature or purposes and it cannot be lifted by courts for whatever reason; it can only be waived by the BIS itself; (2) the BIS is a third party in the litigation between Argentina and the private claimants and cannot have its activities as bank of central banks obstructed by enforcement measures of private creditors; and, (3) the ECHR is not applicable as the plaintiffs do not have a personal claim against the BIS. A decision of the Swiss Federal Tribunal of 12 July 2010 (NML Capital Ltd/EM Limited v Banco Central de la República Argentina) confirmed the BIS position and status of immunity. As stated in para 4.4.2 of the Decision of the Swiss Federal Tribunal:

[i]f national courts can decide what activities of an international organisation are absolutely necessary with a view to the practical fulfilment of its functions, or on the contrary constitute an abuse of law, the independence of such international organisation and the impartiality of national courts would be called into question (see LALIVE, “L'immunité de juridiction des Etats et des organisations internationales”, in: Rec. des Cours, Académie de droit international, 1953, Vol III, p 311; REINISCH, International Organizations Before National Courts, 2000, p 242). For this reason, and to avoid a decision on immunity that does not accord with public international law, the opinion of the international organisation is decisive for the national courts.

54  However the Swiss Federal Tribunal stated that Article 6 (1) ECHR is in principle applicable, though the fact that no judge has the power to review BIS immunities is an acceptable limitation to the ECHR, because a review by a judge would jeopardize the ability of the BIS to carry out its functions properly. As stated in para 4.5.2 of the Decision of the Swiss Federal Tribunal:

[t]he guarantee under Article 6, paragraph 1 ECHR includes the right of access to a court, and any restriction must have a legitimate objective and be proportionate. According to Judgment No 26083/94 of the European Court of Human Rights in re Waite and Kennedy vs Germany of 18 February 1999 (Rec 1999-I, pp 397 ff, § 63), the granting of privileges and immunities to international organisations is one of the most important ways of guaranteeing the proper functioning of such organisations free from unilateral interference by individual states (similarly in the parallel Judgment No 28934/95 of the European Court of Human Rights in re Beer and Regan vs Germany of 18 February 1999; confirmed in Judgment No 1742/05 of the European Court of Human Rights in re Eiffage SA vs Switzerland of 15 September 2009, item 2b; see SHAW, International Law, 5th edition 2003, p 1028). According to the Waite and Kennedy judgment, what is decisive in the question of proportionality (§ 68) is whether reasonable alternative relief is available. In the present case, according to the rules of the Headquarters Agreement there is (indisputably) no direct access for the individual to judicial remedy whereby the Appellee’s immunity in respect of assets entrusted to it can be reviewed.

55  The key argument in the defence of BIS immunity is summarized in para 4.5.3:

[i]n its function as bank of central banks, the BIS manages part of the foreign exchange reserves of a large number of countries and international financial institutions. Were Swiss courts and enforcement agencies to decide whether and to what extent central bank deposits are justified on foreign exchange policy grounds, the BIS would be decisively hindered in its statutory function as international settlement hub for central banks. The BIS freedom of action and the continuity of settlements among central banks in the interests of international financial stability would not be ensured.

56  Forestalling case-by-case determinations of whether central bank property is excepted from immunity due to ‘commercial purposes’, FSIA §1611 (b) (1) grants immunity to the property of a foreign central bank or monetary authority held for its own account from attachment and execution, unless the sovereign or the central bank authority explicitly waives its immunity from attachment from execution. If a foreign central bank uses property for purely commercial as opposed to central bank purposes, then this property is not being used for the central banks ‘own account’, and is not immune from attachment (28 USC §1610). Determining whether mixed accounts used for both commercial and governmental purposes, possess FSIA immunity was contentious until Weston Compagnie de Finance Et D’Investissement, SA v Republica del Ecuador and Others (1993). In that case the judge ordered the funds used for central banking purposes be segregated from those used for commercial purposes, with immunity granted only to the former.

57  But even if central bank property is used for governmental purposes, it may be subject to pre and post judgment attachment under the FSIA if the sovereign has waived immunity, either explicitly or implicitly, subjecting the central bank to suit under §1605 (a) (1). However, given the broad protections offered in the FSIA, waivers are narrowly interpreted and a general waiver from the government of a foreign state should explicitly name the foreign central bank (Patrikis, 1984, 97–98). In Weston Compagnie De Finance the court declined to find a waiver allowing prejudgment attachment to property of the Central Bank of Ecuador, and interpreted FSIA §1611 (b) (1), which deals with attachment to foreign central bank properties, restrictively.

(ii)  Central Bank Reserves under UK Law

58  Under the UK’s SIA, a central bank or monetary authority—as a separate entity—enjoys the same immunity from jurisdiction (adjudication) as a foreign State, except if (1) the entity is seen as submitting to the court’s jurisdiction (sec 2 (1) SIA); or if (2) proceedings relate to a commercial transaction (see sec 3 (1) (a) SIA) . While English courts have granted immunity regarding the issuance of bank notes (Camdex International v Bank of Zambia (No 2), 1997) and the regulation and management of foreign exchange resources (Crescent Oil and Shipping Services Ltd v Banco Nacional de Angola, 1999), issuances of letters of credit and promissory notes are considered commercial activities and thus not immune from jurisdiction (see Trendtex Trading Corporation v Central Bank of Nigeria, 1977; and Cardinal Financial Investment Corp v Central Bank of Yemen, 2000).

59  The role central banks play in financial stability has entitled them to an additional protection under section 14 (4) SIA which sets a conclusive presumption that the property of central banks or of monetary authorities is not property for commercial uses (Proctor, 2000, 70). In light of this presumption, pre-judgment attachment can be granted only if the foreign state has given its written consent (secs 13 (3) and (4) and 14 (4) SIA).

60  Table 3 below summarizes the position of US and UK rules and jurisprudence regarding central bank immunity in relation to pre and post judgment attachments.

Table 3 

Central Bank Immunities

Main Issues



Pre-judgment Attachment

Forbidden (even with an express waiver)

Permitted (subject to an express waiver)

Post-judgment attachment

Property shall be held for its own account.

Property conclusively presumed not to be used for commercial purposes.

(c)  Temporary Restraining Orders under US Law

61  While temporary restraining orders (‘TROs’) in the US differ from attachment or execution under the FSIA, they have the same practical effect of preventing a debtor from removing properties. In American International Group, Inc v Islamic Republic of Iran (1981) it was stated that that TROs are ‘functional equivalents’ of attachments. Rule 65 (b) FRCP states that:

[a] temporary restraining order may be granted without written or oral notice to the adverse party or that party’s attorney only if (1) it clearly appears from specific facts … that immediate and irreparable injury, loss, or damage will result to the applicant …, and (2) the applicant's attorney certifies to the court … the reasons supporting the claim that notice should not be required.

62  Courts may allow creditors to use TROs to circumvent the limitations set forth in the FSIA unless the properties the creditor is seeking to restrain the debtor from using or removing are a central bank’s foreign currency reserve accounts and deposits at the FRBNY (Pfizer, Inc v Islamic Republic of Iran, 1980). This result is grounded in the restrictive interpretations of FSIA §1611 (b) (1) described above.

(d)  Payments from and to International Financial Institutions/Multilaterals

63  Funds paid to or disbursed from international financial institutions (Financial Institutions, International) (eg the IMF, the World Bank Group (‘WB Group’), or regional development banks such as the European Bank for Reconstruction and Development (‘EBRD’), the European Investment Bank (‘EIB’), the Inter-American Development Bank (‘IADB’), the African Development Bank (‘AfDB’), the Asian Development Bank (‘ADB’), the Islamic Development Bank (‘IsDB’), etc) by sovereign debtors are attractive assets for creditors to seize, given that defaulting debtors such as Argentina in 2002 or Greece in 2010 maintain their payments current to these organizations even after an event of default (ie cured within the grace period). It should be noted that Argentina missed loan payments to the WB and IADB for payments US$805 million and US$845 million respectively. Within 30 days of its non-payment to the WB, Argentina made a good faith payment, and entered into a stand-by agreement reached with the IMF on 17 January 2003, which regularized its payments to both parties (La Nación, 2002). Though Argentina argues its good faith payment prevented a default, some scholars argue that when Argentina missed a payment to the World Bank it amounted to a default (Mekay, 2002). Similarly, the IMF through Press Release No 15/310 confirmed that Greece missed the Special Drawing Right (‘SDR’) 1.2 billion repayment in June 2015.

64  These multilateral organizations are composed of states, and their funding is provided by these very same states. Given that a default on a multilateral organization is essentially a default on the international community as a whole, a country defaulting on one would risk becoming a pariah, considering both that their creation was the result of international agreement and that their mandates are widely respected by sovereigns.

65  The status of the assets being paid to or disbursed from the multilateral organizations is critical. In the UK, according to section 1 of Schedule 1 of the International Organizations Act 1968, international organizations are immune from suit and legal process. In the US, FSIA §1611 (a) specifically exempts properties of the IMF, WB Group, EBRD, IADB, ADB, and AfDB from attachment or judicial process of any US federal or state courts impeding distribution of funds to foreign states (1611 (a) USC). While the provisions regarding immunity in the articles of agreement of the IMF, WB, EBRD, IADB, ADB, and AfDB, etc specify means of suing these organizations and enforcing orders against their property, most creditors will be attaching to properties of the sovereign debtor held by the multilateral organizations.

66  Exceptions to immunity exist under US law in the form of (1) pre-judgment waivers of immunity from attachment by the foreign state (28 USC §1610 (d) (1)), its agency, or instrumentality (28 USC §1610 (b) (1)); or (2) judgments based on orders confirming arbitral awards rendered against the foreign state, if attachment in aid of execution, or execution, is consistent with provisions in the arbitral agreement (see 28 USC §1610 (a) (6)).

67  On the off-chance that the creditor is contemplating suing a multilateral organization to attach or execute that organization’s property (held on account and/or for the benefit of the sovereign debtor), a number of requirements must be met for such a multilateral organization to be sued or to have its property attached. These are set out in Table 4 below.

Table 4 










Articles of Agreement of the IMF

Articles of Agreement of the WB

Agreement Establishing the IADB

Agreement Establishing the ADB

Agreement Establishing the AFDB

Agreement Establishing the EBRD

Location in the Source

Article IX

Article VII

Article XI

Chapter VIII

Chapter VII

Chapter VIII


Section 1

Section 1

Section 1

Article 48

Article 50

Article 44

Immunities and privileges shall be accorded in the territories of each member.

Immunities and privileges shall be accorded in the territories of each member.

Immunities and privileges shall be accorded in the territories of each member.

Immunities, exemptions and privileges shall be accorded in the territory of each member.

Immunities, exemptions and privileges set shall be accorded territory of each member.

Status, immunities, privileges and exemptions set forth in this shall be accorded to the Bank in the territory of each member country.

Immunity from Judicial Process

Section 3

Section 3

Section 3

Article 50

Article 52

Article 46

The Fund, its property and its assets, wherever located and by whomsoever held, shall enjoy immunity from every form of judicial process except to the extent that it expressly waives its immunity for the purpose of any proceedings or by the terms of any contract.

Actions may be brought against the Bank only in a court of competent jurisdiction in the territories of a member in which the Bank has an office, has appointed an agent for the purpose of accepting service or notice of process, or has issued or guaranteed securities. The property and assets of the Bank shall, wheresoever located and by whomsoever held, be immune from all forms of seizure, attachment or execution before the delivery of final judgment against the Bank.

Actions may be brought against the Bank only in a court of competent jurisdiction in the territories of a member in which the Bank has an office, has appointed an agent for the purpose of accepting service or notice of process, or has issued or guaranteed securities. Property and assets of the Bank shall, wheresoever located and by whomsoever held, be immune from all forms of seizure, attachment or execution before the delivery of final judgment against the Bank.

  1. (1)  The Bank shall enjoy immunity from every form of legal process, except in cases arising out of or in connection with the exercise of its powers to borrow money, to guarantee obligations, or to buy and sell or underwrite the sale of securities, in which cases actions may be brought against the Bank in a court of competent jurisdiction in the territory of a country in which the Bank has its principal or a branch office, or has appointed an agent for the purpose of acceptingservice or notice of process, or has issued or guaranteed securities.

  2. (3)  Property and assets of the Bank, shall, wheresoever located and by whomsoever held, be immune from all forms of seizure, attachment or execution before the delivery of final judgment against the Bank.

  1. (1)  The Bank shall enjoy immunity from every form of legal process except in cases arising out of the exercise of its borrowing powers when it may be sued only in a court of competent jurisdiction in the territory of a member in which the Bank has its principal office, or in the territory of a member or nonmember State where it has appointed an agent for the purpose of accepting service or notice of process or has issued or guaranteed securities.

  2. (2)  The property and assets of the Bank shall, wherever located and by whomsoever held, be immune from all forms of seizure, attachment or execution before the delivery of final judgment against the Bank.

Actions may be brought against the Bank only in a court of competent jurisdiction in the territory of a country in which the Bank has an office, has appointed an agent for the purpose of accepting service or notice of process, or has issued or guaranteed securities. The property and assets of the Bank shall, wheresoever located and by whomsoever held, be immune from all forms of seizure, attachment or execution before the delivery of final judgment against the Bank.

Immunity from Other Action

Section 4

Section 4

Section 4

Article 51

Article 53(1)

Article 47

Property and assets of the Fund, wherever located and by whomsoever held, shall be immune from search, requisition, confiscation, expropriation, or any other form of seizure by executive or legislative action.

Property and assets of the Bank, wherever located and by whomsoever held, shall be immune from search, requisition, confiscation, expropriation or any other form of seizure by executive or legislative action.

Property and assets of the Bank, wheresoever located and by whomsoever held, shall be considered public international property and shall be immune from search, requisition, confiscation, expropriation or any other form of taking or foreclosure by executive or legislative action.

Property and assets of the Bank, wheresoever located and by whomsoever held, shall be immune from search, requisition, confiscation, expropriation or any other form of taking or foreclosure by executive or legislative action.

Property and assets of the Bank, wherever located and by whomsoever held, shall be immune from search, requisition, confiscation, expropriation or any other form of taking or foreclosure by executive or legislative action.

Property and assets of the Bank, wheresoever located and by whomsoever held, shall be immune from search, requisition, confiscation, expropriation or any other form of taking or foreclosure by executive or legislative action.


Section 10

Section 10

Section 10

Article 57

Article 58

Article 54

Each member shall take such action as is necessary in its own territories for the purpose of making effective in terms of its own law these provisions.

Each member shall take such action as is necessary in its own territories for the purpose of making effective in terms of its own law these provisions.

Each member, in accordance with its juridical system, shall take such action as is necessary to make effective in its own territories the principles set forth in these provisions.

Each member, in accordance with its juridical system, shall promptly take such action as is necessary to make effective in its own territory these provisions.

Each member shall promptly inform the Bank of the specific action which it has taken to make effective in its territory these provisions.

Each member shall promptly take such action as is necessary for the purpose of implementing the provisions of this Chapter and shall inform the Bank of the detailed action which it has taken.





Article 58 establishes that the Bank can waive any of the privileges, immunities and exemptions.

Article 59 establishes that the immunities, exemptions and privileges of articles 52, 54, 56, and 57 may be waived.

Article 55 establishes that the Bank can waive any of the privileges, immunities and exemptions.

68  Case law on attachments to multilateral-disbursed funds are scarce. One instance is Sociéte Européenne d’Etudes et d’Entreprises c/ Banque Mondiale, République de Yougoslavie et Etat Français (1984), which involved a protracted attempt to enforce an arbitral award. The judgment suggests that creditors should establish the enforceability of awards in applicable jurisdictions ex-ante and consider that multilateral organizations may argue, as the WB did in this case (Brief for the WB submitted to the Court of Appeals of Orleans (1979), 1985), that attachment is null and void where awards are communicated to offices unconnected to the lending giving rise to the suit, and that allowing attachments to funds obstructs the purpose of the multilateral organization. By contrast and as previously discussed, in EM Ltd case (473 F 3d 463 (NY 2007)), creditors attempted to attach to central bank reserves of the Argentine government deposited in the FRBNY, arguing that the Argentine government’s decrees requesting that the central bank should pay off Argentina’s debt with the IMF using funds deposited in New York with the BCRA constituted commercial use of the funds, thus excepting the funds from FSIA sovereign immunity provisions. The Court of Appeals ultimately denied the suit for attachment on the grounds that (1) the government’s decrees did not create an attachable interest in the funds absent proof that the central bank was not independent; and, (2) that the nature of the payment to the IMF was regulatory, and not commercial, in nature. The Court of Appeals determined the IMF borrowing programmes’ goals of preserving stability in the international monetary system and fostering orderly economic growth were not commercial.

69  The judgment in EM Ltd case (473 F 3d 463 (NY 2007)) is of relevance to creditors because it sheds light on the point that obligations undertaken within multilateral organizations are obligations of governments and not of their central banks. States are members of the IMF and the central bank might act as their financial and/or paying agent, but the central bank is not the one that assumes the monetary obligation (Art V, §1 Articles of Agreement of the IMF). According to the IMF’s Treasurer’s Department, ‘most members of the IMF have designated their central bank as … the fiscal agency’ (IMF, 2001, 84). Sovereign debtors are, of course, central governments, but they can also be political subdivisions of state-owned companies or central banks. State-owned companies may contract loans and issue debt like any other private corporation and be treated as such, but depending on their legal status and operational reality, they could instead be considered an alter ego of the central government. For example, this happened recently in Crystallex International Corp v Bolivarian Republic of Venezuela (2020), a case in the US where it was held that a Venezuelan state-owned oil company was an alter ego of Venezuelan state.

(e)  Payment of Other Debt Instruments

70  The two factors which are of primary relevance as to whether a creditor will succeed in making an attachment to a sovereign debtor’s funds are whether: (1) the debtor’s payments are made through a fiscal agent or trustee; and (2) the place of payment is the debtor’s country or somewhere else.

(i)  Use of Fiscal Agent or Trustee Structure

71  When issuing debt, the sovereign chooses between a fiscal agent or a trust structure. Under a fiscal agency agreement, an agent is appointed to handle the ‘fiscal’ matters of the issuer (eg redeeming bonds and coupons at maturity). Fiscal is used in a monetary sense to include all financial matters rather than taxes alone. Under a trust structure—indenture or deed, depending whether it is under New York or English law—a trustee is appointed as a fiduciary managing the matters related to the issuance to ensure that the issuer meets all the terms and conditions of the issuance. The main difference between these two structures is that the fiscal agent acts as a representative and agent of the issuer while the trustee is a fiduciary representing the bondholders. The fiscal agent structure has been the prevailing one in international bond issuances, although a recent trend evidences a shift towards trust structures (Buchheit, 2007).

72  Payments made through a trustee cannot be attached because, once the moneys are deposited in the trustee’s account, they no longer belong to the sovereign, but to the trustee who is holding them on behalf of creditors. In contrast, the funds held in a fiscal agent’s account remain funds of the sovereign until the moment the funds are deposited in creditors’ accounts, meaning that funds in transit to creditors’ accounts can still be subject to attachment by other creditors.

(ii)  Place of Payment (Location of Agent/Trustee’s Account)

73  Whilst a sovereign may exercise legal control within its territory to prevent attachment to its assets, the location of the agent or trustee’s account is significant. If the fiscal agent or the trustee has an account outside the sovereign’s jurisdiction, the funds can be threatened by an attachment while in transit. However, if the trustee or fiscal agent holds an account within the sovereign’s jurisdiction, whether the funds are attachable depends on the whether the holder of funds is a trustee or a fiscal agent. The result is the same for fiscal agents holding accounts within or outside the jurisdiction of the sovereign because in both cases the fiscal agent will have to repatriate or transfer the funds abroad to arrange for payments to the sovereign’s creditors. But if a trustee is entitled to hold the funds, they can be safely deposited in the trustee’s account within the sovereign’s jurisdiction and then transferred abroad. Once the funds have safely reached the trustee’s account, beneficial ownership over those funds transfers from the sovereign to the creditors through the trustee and cannot be attached because they are no longer the debtor’s assets.

74  Elliott Associates LP v Republic of Peru and Banco de la Nación del Peru (1999) (‘Elliott’) is a good example of the significance of the choice between the trust and fiscal agency arrangements. A distressed investment fund which purchased Peruvian defaulted bonds on the secondary market was granted a judgment after the court of appeals found that its purchase of the debt was not illegal, though, at the time of purchase, the fund contemplated litigation as a possible means of securing payment due on the bonds. Attachment orders were obtained in different US courts (Florida, Maryland, New York, and Washington DC) (Ministry of Economy and Finance of Peru, 2000). Because Peru had no assets in the US, Elliott attempted to attach assets in Belgium, Canada, England, Germany, Luxemburg, and the Netherlands to seek enforcement of the US court order (López Sandoval, 2002, 12).

75  On 26 September 2000, Elliott obtained a restraining order from the Brussels Court of Appeals (Elliott Associates, LP, General Docket No 2000/QR/92) prohibiting Chase Manhattan (fiscal agent) and Euroclear from paying interest on Peru’s Brady Plan bonds (approximately US$80 million that were due on 6 October 2000). The Court of Appeal’s resolution was grounded on the pari passu clause in the underlying agreement. The court held that a specified debt must be repaid pro rata among all creditors. As noted by López-Sandoval, Elliott’s strategy was twofold: (1) to try to attach the funds at the level of the fiscal agent; and, (2) to capture funds at the level of the clearing houses (López Sandoval, 2002, 13).

76  Elliott forced the hand of Peru, which, to reach an agreement, enacted a range of legislative measures that allowed it to negotiate a settlement. The settlement generated Elliott a 400% increase from the purchase value of the defaulted bonds (Nolan, 2001).

(f)  Military Assets

77  FSIA §1611 (b) (2) provides immunity from attachment and execution to assets of a foreign state which are used or intended to be used in connection with a present or future military activity and which are either: (1) of military character (28 USC §1611 (b) (2) (A)), meaning the character and function of the property are military (House Report No 94-1487, 1976, 6630); or, (2) under the control of a military authority or defence agency. The second class protects other military property such as food, clothing, fuel, and office equipment which although not of a military character, is essential to military operations (House Report No 94-1487, 1976, 6630).

78  In All American Trading Corp v Cuartel General Fuerza Aerea Guardia Nacional de Nicaragua (1993), the plaintiff attempted to enforce a default judgment on two military aircraft held at an airport in Florida for repairs and maintenance. The plaintiff argued that neither prong of 28 USC §1611 (b) (2) applied because the airplanes did not carry weapons or other military equipment but were equipped with ‘more luxurious’ items so they lacked military character, and were not configured for military functions. The District Court granted the immunity, since the evidence established that the aircraft were used to transport senior military personnel, which is essential to military operations, and the alterations did not strip the planes of their military character.

79  Argentina’s early 2000s default led to similar attempts by NML to enforce against 19 assets including warehouses used to store Argentine armaments temporarily housed in the US, and the home of the embassy’s naval attaché (Scrutton, 2004). However, a New York District Court judge stated that the payment streams from Argentine embassies and military entities were immune from inquiry on whether such funds were being used for commercial purposes (Pruitt, 2004), all asset temporary freezes were vacated.

(g)  Assets of the Sovereign or Other Public Enterprises

80  ‘Privately owned’ companies in which a sovereign government either has an interest in or owes money on (in this particular case concession fees but could be any other liabilities) are subject to creditors’ attachments provided that creditors can demonstrate government control over the company or enterprise. In §1610 (b), the FSIA excepts from immunity property of foreign state’s agencies and instrumentalities—as opposed to property of the foreign state itself. Property of an agency or instrumentality of a foreign state in the US is not immune from attachment in aid of executing US court judgments whether or not this property is or was used for the activity upon which the claim is based, if the judgment derives from a claim regarding commercial activity of the agency or instrumentality (§1605 (a) (2)).

81  As result of the Argentine default, Macrotecnic International Corporation—a Uruguay-based corporation—moved for an ex parte writ of execution against bank accounts in the name of Correo Argentino SA—the Argentine postal service—maintained in the New York branches of Lehman Brothers and BNP Paribas. Macrotecnic sought to enforce a ruling entitling it to collect US$452,000 in defaulted Argentine bond payments plus interest. Macrotecnic argued that the re-nationalization of the postal service after a long period of private ownership meant the Argentine government owned the postal service and thus was the owner of the bank accounts in New York. However, after issuing a temporary restraining order permitting the pre-judgment plaintiffs to restrain the bank accounts and directing Argentina to show cause why an order of attachment should not be issued, the court found that the plaintiffs had not met their evidential burden of establishing that Argentina had an attachable interest in the accounts. The court vacated the restraining notices and temporary restraining orders (see Macrotecnic International Corporation v Republic of Argentina, 2004; Latinburg SA v Republic of Argentina, 2004; Hernan Lopez Fontana and Mariana Mori De Lopez v Republic of Argentina, 2004; Million Air Corp v Republic of Argentina, 2005; Denchu Investment Corp v Republic of Argentina, 2006; and, Guillermo Franco and Others v Republic of Argentina, 2007. None of these were reported in F Supp 2d, but see 2004 WL 445131 (SDNY 2004), 12 March 2004.

82  Creditors wishing to attach state agency property should note that FSIA §1610 (c) prevents attachment or execution on a foreign state or agency’s property until a reasonable period of time has elapsed following the entry of judgment and the giving of appropriate notice in the case of a default judgment.

D.  Lessons from Recent Case Law

1.  Pari Passu: NML Capital Limited v Argentina

83  Pari Passu means in ‘equal step’ and in the commercial context it refers to the equal ranking of creditors. A clause, known as the pari passu clause is a common feature in international financial arrangements. It reads as follows: ‘the securities are general, direct, unconditional unsubordinated and unsecured obligations … and shall rank pari passu among themselves and with other present and future unsecured and unsubordinated debt of the issuer’ (Olivares-Caminal, 2009, 1226).

84  After the default of 2001, Argentina launched a comprehensive restructuring of its sovereign debt obligations. At that time, Argentina’s foreign sovereign bonds did not have CACs to force the restructuring over creditors and therefore only 76% of the creditors accepted the offer. NML Capital Limited was one of the creditors which decided to hold out (ie, did not accept the offer) and to sue in New York. The District Court decided that rateable payments were to be made to those who accepted the exchange offer vis-a-vis those creditors that decided to hold out based on the pari passu clause (NML Capital Ltd v Republic of Argentina, 2011).

85  In order words, if Argentina paid the total amount due on interest to the exchanged bonds (ie 100% of the accrued interest payment due over the last six months), it was also obligated to pay to holdout creditors in the entirety of their claim (ie 100% of what was due, the same as those creditors expecting the interest payment). The justification for this interpretation resulted from the so-called Lock Law. The Lock Law was a law passed by Argentine Congress that prevented the National Government from negotiating or paying any outstanding debt to holdout creditors. Based on this law, the court held that Argentina formally degraded the rank of the bonds held by the holdout creditors and issued an exceptional equitable relief measures that required a rateable payment among creditors each time that Argentina intended to pay interest or principal under the exchanged bonds. The court did not hold that pari passu meant pro-rata payments like the courts in the case of Peru erroneously interpreted, but rather that the rateable payments in this case were the result of an exceptional equitable measure issued as a result of Argentina’s exceptional behaviour. This was confirmed by the Court of Appeals (NML Capital Ltd v Republic of Argentina, 2012).

86  However, the decision from the Court of New York was not enough. NML had to somehow enforce the decision to recover the credit.

2.  NML Capital Ltd v France

87  As mentioned at paragraph 84 above, NML Capital rejected the settlement offered by Argentina. Within the recovery measures to enforce the decisions of the court of New York, NML attempted to seize moveable property belonging to Argentina in various countries.

88  In France, NML obtained an interim attachment order over bank accounts belonging to the embassy of Argentina and to Argentina’s permanent delegation to the United Nations. In May 2011, the Paris Tribunal de grande instance recognized the New York court’s judgment, which was necessary for the seizure to take place. Argentina, however, requested the court to lift the order.

89  The judge stated that accounts opened on behalf of an embassy could not be seized, even in the case of Argentina, which had waived its immunity under the bonds held by NML. Based on the 1961 Vienna Convention, the judge stated that the funds held by Argentina in France in the Embassy’s account had diplomatic immunity in relation to enforcement, which Argentina had not expressly waived. NML appealed before the ECtHR stating French courts violated the right to a fair hearing established in Article 6 ECHR, claiming that the decision preventing the enforcement had deprived NML of its right to the execution of a judicial decision.

90  The ECtHR rejected the application as inadmissible for failure to exhaust domestic remedies (NML Capital Ltd v France, 2015; Local Remedies, Exhaustion of). Although NML exhausted all remedies available before the ordinary courts (since it appealed up to the Court of Cassation), NML could have brought an action for liability against the administrative courts of France.

3.  Leo Kuhn v Hellenic Republic

91  Leo Kuhn purchased, through an Austrian custodian bank, Greek sovereign bonds which were affected by the debt restructuring implemented by Greece. The Hellenic Republic conducted a restructuring using CACs. Greek Congress passed a law which provided for the retroactive introduction of CACs to Greek law governed bonds. This allowed the Greek government to pass changes to the terms of such bonds without the need to achieve a unanimous decision among bondholders. As a result, Kuhn’s bonds were replaced with new bonds with a reduction on principal and interest payments.

92  Kuhn claimed before the Austrian courts for the enforcement of the original terms of the Greek bonds while Greece claimed that the Austrian courts lacked jurisdiction to rule on such disputes.

93  The Supreme Court of Austria requested the CJ to interpret the ‘Brussels Ia’ Regulation on jurisdiction in civil and commercial matters, whose general principle is that jurisdiction lies with the courts of the Members State in which the defendant is domiciled.

94  The CJ is a judicial body that settles legal disputes between national governments, individuals, companies, and EU institutions. The CJ held that the ‘Brussels Ia’ Regulation did not apply since the dispute was not a ‘civil or commercial matter’ within the meaning of that regulation, but rather a case that results from actions of the State in the exercise of public authority and from an exceptional decision made within the context of a severe crisis to avoid default. Kuhn’s claim was rejected since the CJ determined that the act of state made by Greece was beyond the judicial review of the courts of Austria (Leo Kuhn v Hellenic Republic, 2018).

4.  Alessandro Accorinti and Others v ECB

95  Also, in the context of the Greek crisis, as result of restructuring carried out by the Hellenic Republic mentioned above, the private sector agreed on a voluntary exchange and a face value reduction of 53.5% of their securities.

96  In parallel, the European Central Bank (ECB) and its national central banks (‘NCBs’), those who are part of the Euro-Area and conform to the Eurosystem, agreed with Greece the exchange of its debt instruments held by the ECB and NCBs for new securities without any principal and/or interest rate reduction.

97  Accorinti and other Italian creditors claimed, before the GC (Alessandro Accorinti and Others v ECB, 2015), damages on their holdings against the ECB resulting from the above-mentioned decision and the exchange agreement achieved by the ECB, mainly, for the infringement of equal treatment of private creditors.

98  The GC considered that the general principle of equal treatment cannot be applied, since the ECB was exclusively guided by public interest objectives, such as safeguarding the management of monetary policy, while the private investors or savers acted in pursuit of a purely private interest (maximizing return on their investments). Other arguments of the creditors regarding the infringement of the legitimate expectations of the private holders and the principle of legal certainty were also rejected by the court.

5.  Mamatas and Others v Greece

99  As in Leo Kuhn v Hellenic Republic, other private creditors tried to challenge, before the ECtHR, the retroactive inclusion of CACs into the Greek law governed bonds based on the right to the protection of property established in the ECHR.

100  The ECtHR rejected the claim arguing that the ‘haircut’ on bonds held by individuals geared to restructuring the Greek public debt during the crisis did not violate their property rights (Mamatas and Others v Greece, 2016).

101  The ruling stated that the forcible participation of private creditors in the exchange through the use of CACs was an interference with the applicants’ right to respect for their property under the ECHR, but such interference pursued a public-interest aim, ie preserving economic stability.

102  The Court considered that the CACs and the restructuring of the public debt represented a necessary measure to reduce public debt and that creditors were aware that their investment, as with any investment in bonds, had certain risks. In other words, the ECtHR determined that the interference in property—a reduction of 53.5% on the value of the bonds through the use of the retroactive CACs—was proportionate considering the economic crisis Greece was suffering and therefore rejected the claim.

E.  Conclusion

103  Though debt claims judgments are fairly straightforward to obtain, creditors should be wary of assuming that execution and attachment of assets in satisfaction of judgments is straightforward. The cases analysed in the previous section are a good example of this. Contractual protections which facilitate restructurings, such as CACs, streamlined pari passu clauses, and creditor engagement clauses may guarantee creditors more certainty in ensuring payments from sovereign debtors.

F.  Acknowledgements

104  The author would like to thank Cristian-Vasile Basiu, Guido Demarco, and Jacqueline Leahy for their research assistance. Any errors or omissions are only attributable to the author.

Rodrigo Olivares-Caminal Sovereign Debt Litigation

Cited Bibliography

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Further Bibliography

  • G Moursi Badr, State Immunity: An Analytical and Prognostic View (Martinus Nijhoff Publishers The Hague 1984).

  • M Gruson and R Reisner (eds), Sovereign Lending: Managing Legal Risk (Euromoney Publications London 1984).

  • CJ Lewis, State and Diplomatic Immunity (2nd edn Lloyd’s of London Press Ltd London 1985).

  • R Olivares-Caminal, Legal Aspects of Sovereign Debt Restructuring (Sweet & Maxwell London 2009).

  • R Olivares-Caminal, J Douglas, R Guynn, A Kornberg, S Paterson, and D Singh, Debt Restructuring (2nd edn OUP Oxford 2016).

Cited Documents

Cited Cases

Further Cases