Capacity to Borrow and Sovereign Debt

Abstract

The application of the ultra vires doctrine to international state contracts is a perennial of international law. This essay investigates the role of sovereign borrowers’ local laws in determining the validity of international sovereign debt contracts. More specifically, it analyses whether ultra vires international financial contracts that are in violation of the borrower’s Constitution, fiscal and borrowing laws, and administrative laws should be set aside. The application of the ultra vires doctrine to state contracts raises a number of challenging questions of private international law and public international law. Above all, it deals with the fundamental question of how to balance the protection of national economic sovereignty with that of international investors.

Despite decades of sovereign debt litigation in London courts, the issue rose to prominence only now in a recent multibillion-pound dispute, Law Debenture Trust v Ukraine. The dispute, which is at the core of the present analysis, saw the Ukrainian government plead its lack of capacity to borrow to invalidate the contract with Russian investors. This essay contends that the approach of English courts to the question of states’ capacity and authority to borrow is far from ideal. As they currently stand, the doctrine of capacity and authority are unable to address the peculiar legal and economic dynamics of public sector international borrowing.