Patricia Adams
UNCTAD/OSG/DP/2007/4 No.185 July 2007
October 26, 2007

The Norwegian government has funded two studies looking into the concept of odious debts. One was conducted by the World Bank, the other by University of Michigan international economic law expert, Professor Howse.

This recent paper by Professor Howse of the University of Michigan Law School (for UNCTAD and financed by the Norwegian government) undercuts odious debt naysayers by describing how odious debt-like challenges have been happening under our very noses; one just need look for them.

And that is precisely what Prof. Howse does: “the international law obligation to repay debt has never been accepted as absolute,” he says, adding that the obligation “has been frequently limited or qualified by a range of equitable considerations, some of which may be regrouped under the concept of ‘odiousness.'”

“Equitable limits to contractual obligations” include illegality, fraud, fundamentally changed circumstance, knowledge that an agent is not properly acting on behalf of the contracting principal, and duress. Furthermore, equity, he says, constitutes part of the content of “the general principles of law of civilized nations,” one of the fundamental sources of international law stipulated in the Statute of the International Court of Justice.

At the same time, he adds, most debt contracts between States and private creditors are governed by the domestic private law specified in the contract and the legal systems of these jurisdictions may well have concepts such as “clean hands” or the notion that contracts related to illegal purposes are invalid. “These concepts,” he says, “overlap with elements of the notion of “odiousness” as a basis for invalidating debt obligations.”

Howse looks at tribunals that have rejected or questioned claims of a transitional regime to adjust or sever debt obligations based on considerations of “odiousness” but finds that, “in none of these situations was a claim of odious debt rejected on grounds that international law simply does not countenance alteration in state-to-state debt obligations based on any equitable considerations whatsoever.” Rather, in these cases, there were doubts about whether some benefit was conferred on the population or whether the claim of odiousness was overly broad. But the tribunal history “does not lead to skepticism concerning the legal grounds for a notion of ‘odious debt’.”

Meanwhile, Howse dismisses the “sky will fall” attitude of critics who warn that odious debt challenges would visit chaos on financial markets. “The common law of contracts has functioned effectively as a default for transactions in financial markets for hundreds of years… There is a rich case law in the common law world concerning the limits of contractual freedom, whereby contractual obligations have been found unenforceable or partly enforceable. Generally speaking, these limits have not prevented the growth of sophisticated and well-functioning financial markets.”

Though some states may chose to repay arguably “odious” debts, Prof. Howse says, the strength of the legal concept is not diminished. “Parties often hold back from the exercise of their full legal rights and obligations for pragmatic reasons, including reputation effects and an interest in maintaining relationships. This does not mean that the rights and obligations are lesser or that their existence does not have an important bearing on the negotiated outcome. It would be mistaken to invoke cases where the debt was arguably odious but the outcome was adjustment not elimination of obligations to show that state practice does not support the existence of an odious debt concept as customary international law.”

Prof. Howse also accepts the notions of responsibility in contractual negotiations from domestic legal systems – such as the duty of diligence on third parties (creditors) to ascertain whether agents (debtor governments) are acting for the benefit of the principal (the population) – as a valid source of international law because these general principles are drawn from the common repository of the world’s main legal systems, or, as lawyers say, from “the general principles of law of ‘civilized nations.'”

When it comes to third parties who might have bought an odious debt unwittingly on the secondary market, buyer beware, says Howse. The law relating to the assignment of contractual rights provides for an aggrieved borrower (who believes he is saddled with an odious debt, for example) to raise the same defences against the secondary owner. “The assignee never gets a better right that than the assignor had.”

Howse doubts the political feasibility of the Kremer-Jayachandran proposal to create an agency to assign the equivalent of “Good Housekeeping Seals” on apparently non-odious governments, arguing that international consensus is unlikely to be achieved to create such a powerful body to make such sensitive judgments – and, if it ever was, judgments would be constantly subject to pressure from donor-creditor interests.

In light of the professor’s case that “state practice, the rulings of international tribunals and the writings of most academic authorities reflect acceptance of some equitable limits (under the concept of “odiousness”) to the sanctity of state-to-state debt agreements,” what should the populations now servicing odious debts do? According to the professor, they should consider using the many legal principles and fora at their disposal. But due to the complexity and variety of transitional contexts, he argues, “there is no single obvious legal forum for the adjudication or settlement of claims of odiousness.”

“Depending on context, such claims might appropriately be raised in bilateral or multilateral negotiations on debt relief, or they could be adjudicated in the context of arbitration or domestic litigation,” he says. However, to avoid inconsistent decisions for a particular debtor State, “a single special transitional tribunal seized with all the claims related to the political transition in question may be an attractive solution.”