BYU Law Review


Sadie Blanchard


When foreign sovereigns default on their debt, creditors sometimes sue them. These creditors are sophisticated actors, and they know that if they sue, courts can do little to force a sovereign to satisfy a judgment. Why do they sue? This Article argues that these creditors sue because they use litigation to produce information about the debtor state or its government that induces third parties to sanction or refuse to deal with the state or the government. The ability to produce such information strengthens the litigating creditors’ bargaining position in settlement negotiations. Courts thus serve as information intermediaries that strengthen reputational enforcement in the international sovereign debt market. The Article presents a case study that includes interviews with market participants and their lawyers to show three ways in which courts play this informational role. First, courts publicly determine whether a sovereign debtor has violated its legal obligations to creditors. Second, through discovery and fact finding, courts mitigate information asymmetries concerning aspects of sovereign behavior related to default that are difficult to monitor. Third, they provide a forum in which creditors seek to recast the broader political and ethical dimensions of disputes by highlighting corruption by the debtor state government. The sovereign debt market thus relies on a hybrid of legal and nonlegal enforcement. Parties appeal to the law to determine rights, detect bad behavior, and provide a broad normative frame. At the same time, they depend on reputation to discourage violations. This finding has implications for the debate among contracts scholars about the extent to which nonlegal mechanisms such as reputation can support trade. Recognizing that courts can function as information intermediaries implies that courts can expand the range of markets that reputation can support. Under certain conditions, courts can supplement legal remedies by transmitting accurate and credible information about market participants’ expectations and behavior.


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