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Kings, Contracts, and the Rule of Law: Republic of Argentina v. NML Capital

Co-authored with John Norton Moore and Robert F. Turner

Last Monday, April 21, the Supreme Court heard argument in a major case involving issues at the core of the rule of law, sovereign immunity, and the right of contract. The case, Republic of Argentina v. NML Capital, involves Argentina’s attempt to avoid liability for its 2001 default on billions of dollars in foreign debt. The specific issue is whether a group of American bondholders, which won court judgments against Argentina over that default, can seek discovery (that is, legally-compelled information) against Argentinian assets outside the U.S. in order to satisfy these judgments. The Second Circuit upheld this discovery. Argentina, supported somewhat surprisingly by the U.S. State Department, is asking the Supreme Court to overturn that ruling.

If Argentina were a private party that owed money to others, there is no question that such discovery would be available to creditors who had judgments against it. In this case, however, there are three complicating factors: 1) Argentina’s status as a sovereign country; 2) the Foreign Sovereign Immunities Act (FSIA); and 3) Argentina’s express waiver of sovereign immunity when it issued its bonds, agreeing to subject itself to U.S. court jurisdiction.

Sovereign states have historically been immune from the judgments of foreign courts, but that is no longer the rule when states engage in commercial activities like selling bonds. Congress embraced this restrictive theory of sovereign immunity in 1976 by enacting the FSIA, and this underlying principle is now settled international law. When it comes to nations engaged in commercial activities, there is no reason to continue the old thinking that, legally, “the king can do no wrong.” As Congress affirmed in the FSIA, when foreign nations engage in commercial transactions in this country, they should be subject to the same rule of law as corporations or private litigants.

That is made doubly clear in this case by Argentina’s express waiver of sovereign immunity in connection with its bonds, since the waiver’s very purpose was to entice American investors to purchase them. When Argentina later defaulted on the bonds, it pressured American investors to accept new bonds valued at less than thirty cents on the dollar. In fact, it went so far as to enact a law prohibiting any payments to creditors, such as the opposing party in this case, who refused to compromise their claims. Since many state pension funds invest in foreign bonds, and are guaranteed against loss by law, if Argentina succeeds in evading its legal debts they may have to be paid by American taxpayers.

Even more outrageously, Argentina has made clear its intention to defy any monetary judgment of an American court in this matter, even though the bond agreement expressly provided that disputes would be resolved under the laws of New York. Not surprisingly, Argentina lost the case in both federal district court and in the court of appeals.

So the issue before the Supreme Court is whether the FSIA somehow restricts the availability of court-sanctioned discovery against Argentinian commercial assets held outside the United States. Such discovery in itself does not necessarily mean that these assets could be seized by the creditors—that’s a battle that they would have to undertake in the courts of the countries in which the property is located. Nonetheless, the State Department’s friend-of-the-court brief urges that discovery should be strictly limited to assets located within the jurisdiction of American courts.

The State Department is correct with respect to categories of sovereign assets which are per se exempt under international law and the FSIA, such as military and diplomatic property and certain central bank accounts—assets which remain protected by sovereign immunity if they truly fall within these categories. But if discovery against Argentinian commercial assets abroad were barred, this could nullify an important feature of an American court judgment--the ability to enforce that judgment in judicial actions abroad. Why should any nation be able to thumb its nose at an American judgment simply by concealing its commercial assets abroad? The stakes here are not only the protection of American pensioners and others who contractually relied on the solemn promises of Argentina, but also the integrity of American judicial decrees.

This case is fundamentally about justice and the rule of law. It is about whether politicians in Argentina—in flagrant violation of a valid contract—can deprive American investors of an effective remedy for their legal injuries.

In perhaps the most famous of all Supreme Court cases, Marbury v. Madison, Chief Justice John Marshall wrote in 1803 that the “very essence of civil liberty certainly consists in the right of every individual to claim the protection of the laws, whenever he receives an injury,” and warned that a government cannot be called a “government of laws, and not of men . . . . if the laws furnish no remedy for the violation of a vested legal right.” The Supreme Court will soon have an opportunity to reaffirm that fundamental principle.

Sam Kazman is General Counsel of the Competitive Enterprise Institute. John Norton Moore served as Counselor on International Law to the Department of State in 1976 and was one of the drafters of the Foreign Sovereign Immunities Act. Robert F. Turner was a senior Senate staff member when the FSIA was enacted and subsequently served as the Acting Assistant Secretary of State for Legislative Affairs (1984-1985). Together, they filed an amicus brief with the Supreme Court in support of the creditors in this case.