"A rifle doesn't scare me. But we expected the Argentines ...

In my last post, I said that the US Court of Appeals for the Second Circuit had interpreted the pari passu clause in Argentina's bonds as a promise to forego a century's worth of restructuring practices. The district judge still needs to clarify the injunction enforcing that promise. While we wait for that very large shoe to drop, I want to talk about the other major enforcement ruckus involving Argentina and ... NML Capital. This one already has people reaching for their weapons.

The Libertad, an Argentine naval vessel, remains in port in Ghana after a court there ordered its seizure and potential sale to satisfy a judgment held by NML Capital. Military property is typically immune from this kind of thing, but the court held that Argentina had waived its immunity in the bond. The case is odd, for reasons I'll explain here. But this post also lays some groundwork for future posts, which will share some evidence about general market practices with respect to immunity waivers.

Here's the waiver of immunity in Argentina's bonds:

To the extent that the Republic or any of its revenues, assets or properties shall be entitled, in any jurisdiction ... to any immunity from suit ... [or] from execution of a judgment ... the Republic has ... irrevocably waived such immunity to the fullest extent permitted by the laws of such jurisdiction...

The waiver is broad - essentially it says: "Wherever you find our property, our waiver is as broad as that jurisdiction will allow." So let's concede that it extends to military property, if creditors can seize that kind of thing. The court ruled that they can. I'd welcome feedback from those with more expertise on the issue, but is this really correct?

Until fairly recently, foreign sovereigns were absolutely immune from suit in national courts and their property was also immune from execution. Even if a country had waived its immunity, it could revoke the waiver. (Here, I discuss how sovereign bonds sometimes included arbitration clauses despite these traditional rules.) In rejecting Argentina's claim to immunity, the court noted that customary international law now recognizes immunity waivers. Fair enough. But does it really recognize advance waivers that extend to military property?

Customary international law is the general and consistent practice of states followed from a sense of legal obligation. I'm not aware of a widespread and consistent practice of allowing seizure of military (as opposed to commercial) assets over a sovereign's objection. This UN Convention seems to recognize waivers that extend to military property (Articles 18, 19, and 21), but it isn't yet in force. And some major enforcement jurisdictions, like the US, clearly do not allow seizure of military property under any circumstances.

Now, I suspect some questionable policies underlie the US rule, including the desire to support US weapons manufacturers (who might lose business if countries feared that creditors would seize their purchases of US-made arms). The legislative history of the US statute acknowledges as much. But aren't there even stronger reasons to preserve the immunity of military property?

When the loan is made, there are plenty of reasons why a country's negotiating team might agree to a broad immunity waiver: inadvertence, reluctance to spend negotiating capital on a seemingly minor point, etc. But after default, if a creditor manages to seize military property, the country's political leaders will feel rather differently. And that can lead to some nasty standoffs. Sort of like - well, like what's happening now in Ghana. Argentina may not be the Rule of Law poster child, but on this question it's no different from any other country. (Political leader to enraged populace: "That US hedge fund is within its rights to seize our battleship. Finance Minister Jones (may he rest in peace) agreed to waive our immunity, and a contract is a contract!")

Think of this from the perspective of political leaders in the enforcing jurisdiction. If your courts can order the seizure of a foreign country's military assets, then they can seriously complicate your diplomatic relations. Of course, you could refuse to carry out their orders - courts rely on other officials to do the actual seizing and selling - but this would weaken your judiciary's perceived authority. Seems like a no-win proposition. Rare as seizure of military assets might be, wouldn't all of the involved countries prefer a rule that preserves the immunity of such property?

Anyway, finance officials in other countries, noting Argentina's predicament, might want to dust off their old bond contracts to review the immunity waiver. As I'll explore in the next post, contracting practices are all over the map, but many bonds have waivers that are at least as broad as Argentina's.