Is sovereign immunity hurting America?
Back in November, Alison Frankel had a very sensible and clear-eyed analysis of the lawsuit which a Cayman-based hedge fund, Fir Tree, is bringing against, essentially, the government of Ireland. In short, Ireland has sovereign immunity, so, no dice. Sorry, better luck next time.
Since then, there’s been no real new news in the case. But for some reason the Economist has decided all of a sudden that this is a terribly important case which “eviscerates law in New York” and which raises a host of worries:
If America’s legal system cannot be relied on for deals done in America, it will become a less attractive place to do business. Borrowing costs may rise, which could prompt non-American companies to take business elsewhere. At the very least, terms will be tweaked.
To make a long story short, the saga here is that Fir Tree wound up buying Anglo Irish debt obligations which were written under New York law. But then Anglo Irish got nationalized, so Fir Tree no longer has a simple commercial contract in New York, facing a bank: it’s now having to line up with other bank creditors of the Irish government.
That’s not a great outcome for Fir Tree, but it’s simply what happens when a bank gets nationalized. Fir Tree would have been no better off had Anglo Irish simply been left to go bust, which was the only other alternative. And any time anybody lends money to a foreign company, they know there’s a risk of nationalization — especially when that foreign company is a bank.
The law in New York, it’s important to emphasize, has not been eviscerated at all. The Foreign Sovereign Immunities Act is the law in New York, it has been the law in New York for as long as anybody can remember, and anybody writing contracts in New York knows about it. Does the existence of the FSIA make New York “a less attractive place to do business”? Not really: it’s been around for a long time, with no visible effect on New York’s attractiveness as a commercial center.
What’s more, you can’t “tweak” the terms of a contract to get around the risk that a foreign company will become nationalized and thereby subject to the FSIA. That’s a known risk for any lender, and there’s nothing anybody can do about it. Moving the contract to some other jurisdiction wouldn’t help, either: the world’s major commercial centers all have laws giving foreign sovereigns immunity on a very broad front. New York is in no way exceptional in that.
As we’re seeing in the saga of Elliott vs Argentina, any attempt to sue a foreign sovereign in New York court is going to be extremely fraught and difficult at best. Some market fundamentalists might have a problem with that: if “corporations are people too”, then why shouldn’t entire countries be people as well? But for the time being, and for the foreseeable future, foreign sovereigns are special in the eyes of the law. And that’s not an evisceration of anything.