Historically, Sovereigns debtors were protected by a principle known as sovereign immunity. This law is derived from the equality of sovereign nations under international law, and it states that a foreign court without their consent cannot sue a sovereign (Panizza et al.,). However, as time passed the U.S government began to endorse a theory that foreign sovereigns were to be denied immunity for commercial activities carried on inside the United States. This was exemplified in the Foreign Soverign immunities Act of 1976, which allowed private parties to sue ta foreign government in U.S. courts if the complaint relates to commercial activity, and under subsequent court rulings meant that the issuance of sovereign bonds was commercial activity happening wherever they were sold ((Panizza et al.,). Under the FSI act, a sovereign broadly included agencies and instrumentalies of a sovereign, and this now meant that sovereigns could be held accountable in a foreign court if they breach a contract. The gradual nullification of sovereign Immunity was not the only factor that leads to the Argentinean debt default. Another was the fact that the argentines decided to issue their debt using New York law not only for the lower interest rates associated with it, but because New York has a well developed body of commercial law, and many of the lenders to foreign sovereign debtors were based in New York. (Pari Passu as a Weapon and the Changes to Sovereign Debt Boilerplate a er Argentina v. NML David New eld). One may assume that the arginteans were very fucked at this point, however Champerty rules put in place to make sure that no one could buy debt, and sue the defendant for money, were The Justinian court went on to observe that “the ancient prohibition of champerty must be reconciled with modern financial transactions,” and stated that New York courts have been correct in their reluctance to find claims champertous, because the “financial industry is critical to New York’s economy, and its courts are rightly wary of fomenting uncertainty in its vibrant secondary debt markets by exposing purchasers of debt instruments to charges of champerty.”. (http://www.thelangelfirm.com/Debt-Defense-Blog/2012/November/The-law-against-champerty-and-its-implications-t.aspx)This narrow view of the champerty laws meant that the Argineteans had essentially no protections against holdout creditors at this time as they had issued and sold their debt under New York law, which combined with the FSI act to open up a huge whole for credtiors to go about sueing the Argintenan system.
Even though the opening was there, the Vulture Capitalist funds were able to truly get what they extract what they wanted through the use of “boiler plate terms”. These “boiler plate terms” are standardized terms that are repeated in contracts so consistently that they lose their meaning over time. (Evolution or Intelligent Design? The Variation in Pari Passu Clauses ) Examples of the boiler plate clauses are the UAC’s, unanimous action clauses, CACS, collective action clauses, and the very important pari Passau clause which was the downfall of Argentinan. These boiler plate terms are inherently, “sticky” or rather very resistant to being changed. This can be either because the drafting party sees no reason to eliminate the term they view as costless, and possibly jeopardize the agreement they are trying to contract. More so, Gulati and Scott, conclude the best explanation for the reoccurrence of these boiler plate terms is found within the title of their book the 3 ½ minute transactions, that being the fact that attorneys at corporate law firms simply download and print off previous contracts, as they have no authority to change it and no incentive to become aware of the flaws (Mitu Gulati and Robert E. Scott. Chicago and London2012. 232.). These boiler plate terms ambiguity, and continual reappearance in all debt contracts gave Vulture Capitalist firms the perfect opening to exploit the ambiguity of the words and forcibly extract debt repayment out of various countries before Argentina.
In fact, the previous episodes before Argentina’s default disaster paved the way for the vulture capitalists to achieve the ruling that they did. Namely, the case of Elliot v. Peru, is the most crucial to this event in the history of corporations forcibly extracting debt. This is because the case against Peru closely mirrors the events of Argentina, however, their was much different outcome. The precursors to this case were very similar in that the bonds were issued under New York Law, and the meaning of the pari passu clause was the thing being disputed. Elliot Associates L.P., a vulture fund, purchased a large amount of distressed Peruvian debt that was :”guaranteed” by the Peruvian government.