Unlawfully-Issued Sovereign Debt

47 Pages Posted: 23 Jul 2020

See all articles by Mark C. Weidemaier

Mark C. Weidemaier

University of North Carolina School of Law

Mitu Gulati

University of Virginia School of Law

Date Written: July 9, 2020


In 2016, its economy in shambles and looking to defer payment on its debts, the Venezuelan government of Nicolás Maduro proposed a multi-billion dollar debt swap to holders of bonds issued by the government’s crown jewel, state-owned oil company Petroleós de Venezuela S.A. (“PDVSA”). A new government now challenges that bond issuance, arguing it was unlawful under Venezuelan law. Bondholders counter that this does not matter—that PDVSA freed itself of any borrowing limits by agreeing to a choice-of-law clause designating New York law.

The dispute over the PDVSA 2020 bonds implicates a common problem. Sovereign nations borrow under constraints imposed by their own laws. Loans that violate these constraints may be deemed invalid. Does an international bond—i.e., one expressly made subject to the law of a different jurisdiction—protect investors against that risk? The answer depends on the text of the loan’s choice-of-law clause, as interpreted against the backdrop of the forum’s rules for resolving conflict of laws problems.

We show that the choice-of-law clauses in many international sovereign bonds—especially when issued under New York law—use language that may expose investors to greater risk. We document the frequent use of “carve outs” that could be interpreted to require the application of the sovereign’s local law to a wide range of issues. If interpreted in this way, these clauses materially reduce the protection ostensibly offered by an international bond. We explain why we think a narrower interpretation is more appropriate.

Keywords: sovereign debt, conflict of laws, choice of law, Venezuela, PDVSA

JEL Classification: F34

Suggested Citation

Weidemaier, Mark C. and Gulati, Mitu, Unlawfully-Issued Sovereign Debt (July 9, 2020). UNC Legal Studies Research Paper, Duke Law School Public Law & Legal Theory Series No. 2020-49, Available at SSRN: https://ssrn.com/abstract=3647283 or http://dx.doi.org/10.2139/ssrn.3647283

Mark C. Weidemaier (Contact Author)

University of North Carolina School of Law ( email )

Van Hecke-Wettach Hall, 160 Ridge Road
CB #3380
Chapel Hill, NC 27599-3380
United States
919.843.4373 (Phone)

Mitu Gulati

University of Virginia School of Law ( email )

580 Massie Road
Charlottesville, VA 22903
United States

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