It is notoriously hard to recover money from a sovereign debtor that defaults. Argentina has resisted its hold-out creditors since its default a decade ago, and the recent judgment of the Supreme Court in NML Capital Limited v. Republic of Argentina has shown a very narrow path through the minefield of sovereign debt litigation. The court’s conclusion on the effectiveness of clauses purporting to waive immunity or confer jurisdiction will be of key relevance to those considering lending to sovereign states. A waiver of immunity does not automatically mean that a sovereign can be sued in the English courts, and special care is needed when such clauses are drafted.

The Background

NML owned bonds issued by Argentina. Those bonds were subject to New York law and jurisdiction. NML sued on the bonds in New York and obtained a judgment for US$284,184,632. Argentina did not pay. NML wanted the option of enforcing its judgment in England. There are no reciprocal arrangements in place between the UK and the US for the mutual recognition of judgments. To enforce its New York judgment, NML had to sue Argentina in London, not under the terms of the bonds, but on the unsatisfied judgment itself.

Argentina said that it enjoyed sovereign immunity and was not subject to the jurisdiction of the English court. If Argentina had succeeded in the Supreme Court, it would have been able to hold assets in the UK and NML would not have been allowed to enforce its judgment against them.

The Issues

The Supreme Court decided a number of issues, of which two stand out for present purposes:

  • Was NML’s claim on the New York judgment “proceedings relating to a commercial transaction”?
  • Had Argentina submitted to the jurisdiction of the English courts?

Why were these questions so important? Sovereign states are generally immune from the jurisdiction of the English court and cannot be sued here, but there are exceptions to this rule. Two of the most common exceptions are (i) where the state in question is engaging in a commercial transaction and (ii) where the state has submitted to the jurisdiction of the English courts.

“Proceedings relating to a commercial transaction”

Argentina’s bond issue was a commercial activity and NML’s litigation was concerned at heart with Argentina’s failure to pay out under those bonds. NML therefore argued that Argentina should not be protected by sovereign immunity.

The Supreme Court disagreed. It held that, because NML sued Argentina on the basis of its New York judgment and not the bonds themselves, its proceedings did not relate to a commercial transaction.

It is quite common for a successful litigant in the US to try to enforce a judgment in England if it believes its debtor to have assets here. Where the debtor is a sovereign, the immunity battle may well need to be fought afresh.

Submission to the jurisdiction of the English courts

The Supreme Court made it entirely clear that a clause waiving the right to sovereign immunity does not equate to a submission to the jurisdiction of the English courts. It removes one obstacle to suing a state but the lender trying to recover must still show that it is entitled to sue in England. It is not enough to draft a wide-ranging waiver of immunity and assume that the lender then has carte blanche to sue the debtor wherever it chooses.

In this case, the draftsman of the bonds had foreseen that a bondholder might need to sue on a New York judgment to have it enforced elsewhere. The wording he included was lengthy, and in the Supreme Court (unlike in the Court of Appeal) it held. The clause was sufficiently widely worded that the Supreme Court was satisfied that Argentina had agreed that it would not be protected by sovereign immunity if a creditor was otherwise allowed to enforce a New York judgment in England.

The Supreme Court found that, in this case, the assertion of sovereign immunity was the only bar to recognition of the New York judgment in England, and Argentina’s argument failed.

Conclusions

The NML/Argentina story ended well for NML, but it is worth bearing a few points in mind:

  • When lending money to sovereign states or equivalent entities, lenders should make sure they think through the mechanics of recovery in the event of a default. Where will they want to sue? Where does the state hold assets? Drafting will need to be wide enough and flexible enough to deal with those considerations.
  • Sovereign immunity is not absolute.
  • A judgment is not the same as cash in hand. Enforcing a judgment against a sovereign state is likely to be harder than getting it.  

Law stated as at 17 November 2011