Courts and Sovereigns in the Pari Passu Goldmines

The pari passu clause in sovereign bond contracts has spawned an improbably huge academic literature and a fast-growing jurisprudence, culminating in recent U.S. federal court decisions, which used the clause to block payments on nearly $30 billion in Argentinian debt. The academic literature, judicial opinions, briefs and expert reports going back to the mid-1990s all assume that no court had interpreted the pari passu clause in sovereign debt before the year 2000. It turns out that there were at least four instances of such interpretation in the twentieth century.This essay discusses litigation in Switzerland in the 1930s and a decade-long international arbitration in the 1970s, in which four different panels considered the meaning of pari passu clauses in German Young Loan bonds. All four panels interpreted the clause in ways that might well be consistent with those of the U.S. federal courts; however, the bondholders still lost.Documents from the League of Nations archives suggest that the 1930s lawsuit against the Bank for International Settlements as trustee for the German bonds influenced proposals for contract and institutional change in sovereign debt management, notably with respect to the role of the bond trustee. To the extent such reforms might have had a chance, World War II and its aftermath put them on hold until the turn of the 21st century. As the dust from Argentina's debt saga begins to settle, the old disputes over the meaning of pari passu offer unexpected lessons for debt enforcement and contract reform.