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What to do When Your Contract is a Dog's Breakfast

posted by Mitu Gulati

Tomorrow is the first of the two days when the students in my international debt class (with Steve Choi and Lee Buchheit) present their final papers to a group of outside experts.  The students have come up with some intriguing ideas for the restructurings of Lebanese and Argentine debt, a couple of which I flag below.

  1. What to do When Your Contract is a Dog's Breakfast?

Mark and I have complained about the Lebanese sovereign bond contracts on this site before (here).  I confess that there are portions of it -- the CACs and the pari passu clauses in particular -- that utterly befuddle me.  Now, maybe this is because I'm easily confused and a more sophisticated reader would understand the contract. But let us assume for the sake of argument that this contract really is the proverbial dog's breakfast. That then raises the question of: What is a court to do when faced with a contract full of confusion? (drafting guru Ken Adams uses the following delightful expression for some especially horrid contracts that he has seen -- dumpster fire).  My sense is that New York courts generally pretend that even contracts that they suspect are the product of bad cut and paste jobs were intentionally and rationally drafted.  The theory being that this gives parties -- especially those represented by fancy lawyers -- an incentive to do a better job the next time. 

At least two student groups though (Adriana and Luke from NYU, here, and Alex, Chris & Brenda from Duke, here), suggest that there is reason to think this situation could play out otherwise.  They've identified a provision in the Lebanese bonds (23(1) c of the Fiscal Agency Agreement) that gives the authority to cure any ambiguity or appropriately supplement any provision to the issuer.  Yes, sole authority goes to the issuer with the only constraint being that the issuer cannot make changes that harm the holders of the bonds (basically, that the issuer cannot act opportunistically).  This is potentially huge for Lebanon, since I am willing to wager that it would not be that difficult to get expert testimony from a dozen or so of the most eminent sovereign debt lawyers that the contract here has some major issues.  Further, since these are standard form contracts where it is easy to figure out what the market standard for the provisions in question say, the issuer can safely fill the gaps without being at substantial risk of being found to have acted opportunistically in violation of 23(1) (the student papers do a nice job of digging into the literature and identifying the relevant market standards -- which would, as I understand the arguments in the papers, help Lebanon considerably). Game, set and match to Lebanon?

Question is: Will the Lebanese lawyers use this contractual advantage?  The above language from 23(1) was also present in the Argentine sovereign debt contracts that contained the infamous pari passu clauses that got Argentina into horrible trouble with Judge Greisa and then the Second Circuit almost a decade ago. Those provisions were widely agreed to be relics of the past that no one understood and had little contemporary value.  Yet, even though there was hushed discussion of using the Argentine equivalent of 23(1) in some circles, the Argentine lawyers never used 23(1) to help clarify the meaning of their pari passu clause.  And that makes me wonder whether there was some reason that I'm not seeing as to why the argument was not used (maybe lawyers don't like saying that contracts drafted by their predecessors were dumpster fires?).  I'll find out more tomorrow, I hope.

    2. The Necessity Doctrine in the Time of Corona

A second intriguing possibility that a number of student papers have raised, but that one student paper focuses exclusively on, is the Necessity defense from customary international law.  Simplifying, the doctrine says that nations can get temporary relief from their contractual obligations in the narrow circumstances where some exogenous event occurs that causes them to need to divert resources towards helping their populace.  Charlie, Andres and Michael (here) argue that the current pandemic is precisely the kind of rare situation the Necessity doctrine was designed for.  They are not by any means saying that Argentina is entitled to a reduction in its debt obligations under the Necessity doctrine. Instead, if I understand their paper, their argument is that current levels of uncertainty so high and the need to put resources into health care so palpable that courts should be willing to grant Argentina temporary relief from suit.  And the fact that the G20 countries have just indicated that they are indeed contemplating temporary standstills for the debt obligations of the most distressed nations around the globe (here) is some support for the argument that Charlie, Michael and Andres make on behalf of Argentina.  

As as aside, Mark and I discussed the use of the Necessity defense many moons ago in the context of the Casa Express v. Venezuela case, where we thought it was something of a long shot (here).  The reason being that there was a pretty strong argument that Venezuela's financial crisis was one of its own making.  And one could argue that Argentina's debt crisis is of its own making. But Charlie, Andres and Michael respond to this argument by reiterating that they are not asking for debt relief on account of the Coronavirus -- just a temporary standstill so that the country can help save the lives of its own people.  Question is: Can they persuade a New York court that these circumstances are so unique that the recognition of the defense will not destroy the market?  


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