Sovereign Piracy

37 Pages Posted: 4 Jun 2001

See all articles by Mitu Gulati

Mitu Gulati

University of Virginia School of Law

Kenneth N. Klee

University of California, Los Angeles (UCLA) - School of Law


Sovereign Piracy lays bare the recent efforts of vulture investor Elliott Associates to holdup the Government of Peru. When Peru tried to restructure its Brady Bonds Elliott launched global litigation to tie up the money and force Peru into default. A Brussel's court brought Peru to its knees and forced it to settle with Elliott. Elliott's leverage was based on its novel interpretation of the so-called pari passu clause which requires a debtor's creditors to rank equally.

The article first explains why, from an ex ante bargaining perspective, sovereign debtors would be loathe to agree to pari passu clauses with the interpretation given by the Brussels court. Next, the article looks to the literature and case law construing sovereign and corporate debt and demonstrates why the Brussels interpretation is wrong, results in a windfall to holdout creditors, and is harmful to the majority of other creditors. The article then discusses New York bond interpretation law and the need for the Brussels interpretation to be challenged. The article concludes with some important insights about market changes that will result if the Brussel's interpretation is allowed to stand.

Suggested Citation

Gulati, Mitu and Klee, Kenneth N., Sovereign Piracy. Available at SSRN: or

Mitu Gulati (Contact Author)

University of Virginia School of Law ( email )

580 Massie Road
Charlottesville, VA 22903
United States

Kenneth N. Klee

University of California, Los Angeles (UCLA) - School of Law ( email )

385 Charles E. Young Dr. East
Room 1242
Los Angeles, CA 90095-1476
United States
310-825-7460 (Phone)
310-206-7010 (Fax)

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