Commentary on “Who is the Sovereign in Sovereign Debt?” by Odette Lienau

by Tai-Heng Cheng

My thanks to Opinio Juris and the Yale Journal of International Law for inviting me to comment on an excellent article by Odette Lienau titled “Who is the Sovereign in Sovereign Debt?” 33 YALE J. INT’L L. 63 (2008).

Odette addresses with aplomb the difficult problem of whether a government should be made responsible for the financial debts incurred by a prior despotic government. She accurately points out that this problem implicates two conflicting global policies: “financial workability” and “greater attention to states’ underlying populations.” (p. 110). Canceling debt risks damaging creditors’ balance sheets and credit markets, as well as limiting the state’s access to future capital. But imposing debts incurred by a despot on his victims after he is long gone seems unfair.

Odette looks back to move forward. She reinterprets Chief Justice Taft’s famous 1923 Tinoco arbitration award to propose a solution to balance the needs of credit markets and the formerly oppressed. Taft decided that Costa Rica would remain responsible for sovereign debts incurred by Frederico Tinoco, the former Minister of War who had seized power unconstitutionally. However, sovereign debts could only have been made in accordance with Costa Rican law and for governmental purposes. Thus, Costa Rica was not responsible for concessions that were never properly made under Costa Rican law. It was also not responsible for $200,000 in loans purportedly extended to Costa Rica but in fact lent to finance Tinoco’s trip abroad and an advance payment to his brother. Extrapolating this decision as “precedent for odious debt cancellation,” (p. 90) Odette proposes that governments today should be responsible for the sovereign debts incurred by their predecessor government even if that government was despotic and abusive. The only exceptions would be if the debts had not been incurred in accordance with the state’s domestic laws, or if they were not for legitimate government purposes.

Odette’s careful development of her thesis has many marks of good scholarship: the framing of an international problem; the identification of conflicting policy goals; the study of past decisions; and, importantly, the invention of an alternative approach to promote and harmonize the relevant policy goals. With some modesty, Odette states: “The . . . analyses presented here are insufficient to ground a strong policy proposal.” (p. 110). How might this be so?

Doctrinally, the Tinoco arbitration is not precedent for anything. Arbitrations, being privately sponsored systems of dispute resolution, derive their authority from the consent of parties to the arbitration. Thus, arbitral awards have long been held to bind only the parties and only in that dispute. An award may be persuasive, or even a subsidiary source of international law, as provided for by Article 38 of the Statute of the International Court of Justice codifying the customary law on sources of international law. However, to call it precedent strictu sensu is overstating its legal authority.

Further, contrary to what some scholars have asserted, the Tinoco arbitration does not support a doctrine of odious debt. The Tinoco arbitration concerned government succession, not state succession. The putative doctrine of odious debt could only apply to state succession, not government succession.

In state succession, there are no comprehensive rules as to whether the successor state continues to be bound by the obligations of its predecessor state. Thus, an odious debt doctrine, if it existed, could supply rules governing a narrow category of debt obligations to fill the interstices.

In government succession, international law has long held that a successor government is always responsible for the debts of its predecessor. As Odette reproduces Taft’s invocation of John Basset Moore: “Though the government changes, the nation remains, with rights and obligations unimpaired.” (p. 74).

The Tinoco award is consistent with exclusion of a doctrine of odious debt from government succession. Taft stated that restorationist Costa Rica government was responsible for the debts of the Tinoco government. The successor Costa Rica government was not responsible for the concession in question not because it was nullified by odiousness, but because it was improperly executed under the law applicable to the concession. The successor government was not responsible for the debt incurred by Tinoco for his personal use not because it was a state debt invalided by odiousness, but because it was never a state debt to begin with, even if it was dressed up in sham words to disguise it as such. Under the award, had the Tinoco government incurred debts under Costa Rican law to buy arms or pay soldiers to murder, rape and plunder resistance fighters, the resistance could have found themselves responsible for those debts when they formed the restorationist government.

Ultimately, however, since Odette is concerned with the invention of law, doctrinal irregularities of her proposal under existing law are of less import. What matters most is whether the proposal does what it says it will do.

Here the devil is in the details. Odette states that one advantage of her proposal is that “it presents a coherent framework for understanding internationally valid sovereign action on the basis of a state’s internal rule of law.” (p. 81). But if the rule of law in this context means simply that tyrants will have to enter into loans or concessions with foreigners by complying with proper domestic legal procedures, this proposal does not go very far in protecting the oppressed. One of the hallmarks of tyrants is their ability to change laws to suit their whims.

Another potential advantage of Odette’s proposal is that it is supposed to “pay greater attention to a state’s underlying populations.” (p. 110). When ravaged by a despot, a state desperately needs money: to rebuild its roads; educate its children; care for its injured. There is no nexus between the injustices of the past and the financial needs of the future. Canceling loans that financed oppression in the past does not necessarily account for the impact on access to fresh loans and damage to business relationships. Conversely, respecting debts incurred legitimately does not account for their financial burden on the population. If the policy goal is to stabilize and develop transitional states, then the law we recommend should not fixate on old grievances. Instead, the legal principle guiding renegotiation should focus on the effect of termination or continuity of obligations on the state moving forward.

One of the joys of membership in the international college of jurists, along with Odette and others, is the intellectual exchanges that unite us in the search for better laws. Opinio Juris has enhanced this experience by providing an opportunity here to debate, discuss, and disseminate. I look forward to vigorous responses from Odette and others, after which I hope we will have a drink together.

http://opiniojuris.org/2008/06/10/commentary-on-%e2%80%9cwho-is-the-sovereign-in-sovereign-debt%e2%80%9d-by-odette-lienau/

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