Market Practice and the Evolution of Foreign Sovereign Immunity

Abstract

The twentieth century witnessed a “tectonic” shift in international law, from absolute to restrictive theories of sovereign immunity. As conventionally understood, however, this transformation represented only a change in default rule. Under absolute immunity, courts could not hear lawsuits and enforce judgments against a foreign sovereign without its consent. Under restrictive immunity, foreign sovereigns were not immune to their commercial acts, regardless of consent. Using a two‐century dataset of loan contracts, we show that market practice undermines this conventional understanding. For centuries, loan contracts were structured as if the rules of sovereign immunity could not be changed by contract. In the 1970s, however, market practice changed, seemingly in response to the codification of sovereign immunity law in the United States and United Kingdom. We explore why market practice conflicts with the conventional understanding of sovereign immunity, and we examine the association between codification and the structure of sovereign loan contracts.

Sovereign Debt Puzzles

“…Sovereigns have always been able to waive their immunity. And they normally do so when they borrow internationally (Waibel 2011;Weidemaier 2014;Weidemaier & Gulati 2018). Furthermore, courts are sometimes willing to find that immunity was implicitly waived if the sovereign has taken actions such as agreeing to a venue for litigation or a governing law clause indicating that the sovereign is acting as a commercial actor (Weidemaier 2014;Coyle 2022).…”

“…Furthermore, courts are sometimes willing to find that immunity was implicitly waived if the sovereign has taken actions such as agreeing to a venue for litigation or a governing law clause indicating that the sovereign is acting as a commercial actor (Weidemaier 2014;Coyle 2022). Enforcing judgments remains difficult, but if immunity were to truly protect the sovereign, we would see far less litigation; attempts to enlist the courts to collect would be seen as fruitless (Weidemaier & Gulati 2018). The lack of an absolute sovereign immunity is also exemplified by certain contractual terms that sovereigns take great effort to negotiate and (in some cases) that are priced by financial markets (Choi, Gulati & Posner 2012Ratha, De & Kurlat 2018;Weidemaier & Gulati 2018;Bradley et al 2022).…”

“…Enforcing judgments remains difficult, but if immunity were to truly protect the sovereign, we would see far less litigation; attempts to enlist the courts to collect would be seen as fruitless (Weidemaier & Gulati 2018). The lack of an absolute sovereign immunity is also exemplified by certain contractual terms that sovereigns take great effort to negotiate and (in some cases) that are priced by financial markets (Choi, Gulati & Posner 2012Ratha, De & Kurlat 2018;Weidemaier & Gulati 2018;Bradley et al 2022).…”

State Immunity in International Investment Disputes: Role of State Immunity in Resolving Investment Disputes and Adjudication Implications

“…Another recent example of restrictive immunity from jurisdiction can be illustrated by the South Korean and Brazilian courts which have ruled that in the light of jus cogens, no absolute immunity is reserved by any court over the violation of human rights and internationally-recognized crimes. 11 Therefore, it can be construed that state immunity is not absolute and can be restricted or waived in certain circumstances, such as when a state engages in commercial activities or when it consents to the jurisdiction of another state (Weidemaier & Gulati, 2018). In addition, the conception of State immunity from execution which is interchangeably known as immunity from the enforcement or execution immunity refers to the protection granted to a state's assets or property from being seized or enforced upon by the courts of another state.…”