Is sovereign immunity hurting America?

By Felix Salmon
April 27, 2012
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.

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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.


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Nice article. I find the Economist can be a little too sensationalist at times, and tells only the part of the story that suits the right wing bias the proprietor of said publication wishes to push. I used to subscribe to them but now just get the occassional issue, solely with this problem.

Now I’ve found your blog Felix, I get a very good overview with lots of meat and can make my own mind up. Keep doing your Sterling work!

Posted by FifthDecade | Report as abusive

Thanks for the shout-out, Felix. The Economist is way overstating the impact of the Anglo Irish ruling. There’s a commercial activities exception to the FSIA. It didn’t apply here because Fir Tree is Caymans-based. If the Economist really wants to fret over U.S. courts losing jurisdiction over U.S. transactions, it should look at Morrison v. National Australia Bank instead.
–Alison Frankel

Posted by AlisonFrankel | Report as abusive

The lesson is straightforward. Better to do business in the private sector. Keep the State and commerce separate.

Posted by Sal20111 | Report as abusive

Um … there’s actually a little more going on with this than Felix and Frankie seem to appreciate. It’s a front-burner topic just now because the appellate briefs were filed, and because of YPF/Argentina and the Elliott case.

The lessons –

- Secured loans beat the hell out of unsecured every time. Not news.
- Don’t plan on using pre-judgment attachment against sovereign assets to turn an unsecured loan into a secured one. This is big.
- No kind of contract with a private sector party will help you when you’re facing a sovereign successor-in-interest. This is maybe new, and maybe big or not.
- The US government seems to love foreign dead-beat sovereigns more than it loves anyone who lends good money in good faith to them or their nationals. This is sadly unsurprising.

Posted by MrRFox | Report as abusive