Patricia Adams
Duke Law
October 20, 2007

If you haven’t read this paper [PDF] (it’s been circulating on the Internet for some months and is posted here in abstract) then you’re in for a treat. Entertaining, clear and compelling, “The Dilemma of Odious Debts” is an unusual entry to the canon because the authors argue that while challenging odious debts under public international law is most likely hopeless, resorting to private domestic law is very hopeful. So this paper adds a whole new set of possibilities for odious debt investigators to pursue.

Here are the authors’ principal points.

Authors Buchheit et al. argue that when legal scholar Alexander Sack wrote his thesis about odious debts in the 1920s [PDF] , an “absolute” theory of sovereign immunity prevailed (meaning that sovereigns could not be sued in foreign courts without their consent). The only way to resolve a conflict over a debt alleged to be “odious” was as a matter of public international law. But in order to do that, an international consensus about what constituted an odious sovereign debt was required. Buchheit et al. argue that arriving at this consensus was no easy task, and, as a result, the legal concept languished for years. Write the authors:

“As a putative ‘doctrine’ of public international law, it faced an El Capitan of definitional obstacles. Had it flown at all (which we doubt), it probably would have flown very low, far beneath the level of near-universal consensus required to make it a binding norm of international law.”

By the middle of the last century, however, the prevailing notion of absolute sovereign immunity gave way to a “restrictive” theory, under which sovereigns could be held accountable in municipal courts for their commercial activities abroad. By the late 1970s, this restrictive theory was codified into law in both the U.S. and U.K.

Hence, “for the last 30 years in the United States, the legal enforcement of foreign sovereign debt obligations has been the province of U.S. federal judges applying conventional doctrines of state contract law. In those lawsuits, the sovereign defendants are perfectly at liberty to assert defenses based on principles of that same contract law or on U.S. public policy generally.”

It is here the authors find hope.

“We have suggested that the entrenched hostility of American law to bribery, litigants with unclean hands, faithless agents and public officials embezzling state funds under the cover of what we have called the ‘government veil,’ is adequate to allow a sovereign defendant to defend itself in an American court against the attempted enforcement of what Alexander Sack would have recognized as an odious debt.”

While this approach will not provide a “legal pretext for wholesale debt cancellation for emerging market countries previously ruled by kleptomaniacal regimes,” they say, it “will certainly have an in terrorem effect on prospective lenders that are toying with the idea of lending to disreputable regimes.”

And, we at ODO would add, it would have an in terrorem effect on existing creditors who, wishing to avoid U.S. federal judges, would preemptively abandon their claims.