Defenses to Payment of Foreign Debt - Part 1 Chapter 19 - The Practice of International Litigation - 2nd Edition
Lawrence W. Newman has been a partner in the New York office of Baker & McKenzie since 1971, when, together with the late Professor Henry deVries, he founded the litigation department in that office. He is the author/editor of 4 works on international litigation/arbitration.
Michael Burrows, Formerly, Of Counsel, Baker & McKenzie, New York.
The economic difficulties that beset numerous Latin American countries in the 1980s resulted in, among other things, billions of dollars in unpaid debt owed by foreign governments and private borrowers. One response of countries afflicted with such debt was to impose exchange control or similar regulations or decrees that had the effect of altering the terms of the debt obligations. A creditor under these debt instruments, in deciding whether to pursue a lawsuit, faced certain obstacles—including the Foreign Sovereign Immunities Act (“FSIA”) and the act of state doctrine—that do not confront parties seeking relief against domestic, private debtors.
In 1987, the Second Circuit held that, at least to the extent that a debt is payable in the United States, the act of state defense is unavailable. Later, the Supreme Court held that a foreign sovereign debtor is not entitled to immunity from a suit to collect unpaid debt obligations, again, at least to the extent that such obligations are payable in U.S. dollars in the United States. A decision in the United States District Court for the Southern District of New York (Judge Sweet) suggests that another defense that implicates notions of sovereignty—comity—should also be sparingly applied.
Act of State Defense
The act of state doctrine is a judicially created defense, under which United States courts may not adjudicate challenges to the validity of official acts of a foreign sovereign. The Supreme Court‘s decision in 1897 in Underhill v. Hernandez is generally considered to be the earliest statement of the act of state doctrine under United States law. In dismissing a case brought by an American citizen, who alleged that he had been unlawfully assaulted by a revolutionary Venezuelan military commander whose government was later recognized by the United States, Chief Justice Fuller stated:
Every sovereign State is bound to respect the independence of every other sovereign State, and the courts of one country will not sit in judgment on the acts of the government of another done within its own territory.