Sovereign Debt Restructuring: Should We Be Worried About Elliott?

HARVARD LAW SCHOOL
International Finance Seminar

Professor Hal Scott and Professor Howell Jackson
SOVEREIGN DEBT RESTRUCTURING:

SHOULD WE BE WORRIED ABOUT ELLIOTT?
EDUARDO LUIS LOPEZ SANDOVAL

Cambridge - Massachussets
May 2002
TABLE OF CONTENTS
I.
INTRODUCTION...3
II.
THE ELLIOTT CASE: FACTUAL BACKGROUND AND POST-JUDGEMENT

LEGAL STRATEGY...7
III.
1.
What exactly happened?..8
2.
The Brussels Court of Appeals Decision...17
3.
The Opinion of Professor Andreas F. Lowenfeld..20
INTERPRETING THE PARI PASSU CLAUSE...24

1.
An Alternative Interpretation.24
2.
Elements to be considered when interpreting the pari passu clause.36

2.1
Necessity to pay preferred creditors first....37
2.2
The role played by other clauses included in international loan

contracts..39
3.
2.3
Variations on the conventional terms of the pari passu clause.44
2.4
International public policy issue: the holdout creditor problem...45
Rules for the Interpretation of International Loan Contracts.48

3.1
New York Rules49
3.2
English Rules...50
IV.
FORMAL ASPECTS OF THE BRUSSELS DECISION.54
V.
ADDITIONAL SUBSTANTIVE ISSUES58
VI.
1.
Execution of NY decisions58
2.
Property over funds transferred to Euroclear.61
CONCLUSION..62
-2-
INTRODUCTION
One of the most important cases of the last decade, in the sovereign debt arena,
was that involving the New York-based hedge fund named Elliott Associates, LP
(hereinafter referred to as Elliott) against the Republic of Peru1 (hereinafter referred to as
Peru). After several years of litigation, the final decision favored Elliott and confirmed
various substantive issues relating to sovereign debt litigation. First, it was held that
buying distressed debt and suing the sovereign to make good on its obligations is not
against New York Champerty Law, therefore eliminating one of the few legal defenses
available to sovereigns against holdout creditors. Second, the Court clarified the
application of the US Foreign Sovereign Immunities Act with regard to which assets are
subject to being attached in execution of the Courts decision, stating clearly that all
assets, located in the jurisdiction where the suit is brought, are subject to attachment, if
they belong to an entity that (i) was somehow involved in the matter; (ii) is an agency or
instrumentality2 of the defaulting sovereign; and (iii) is engaged in commercial activity in
the US.
As it will be explained in more detail in the second part of this paper, Peru acted as a guarantor of the two
debtors involved in this case, namely Banco de la Nacion and Banco Popular del Peru.
2
Under 1610(b) of the US Foreign Sovereign Immunities Act, an agency or instrumentality of a state is
defined as an entity which is a separate legal person, corporate or otherwise; an organ of a foreign state or
political subdivision thereof; neither a citizen of a State of the United State, nor created under the laws of
any third country. See Farisa Zarin, How to Sue a Sovereign: The Case of Peru, Moodys Investors Service,
Special Comment (Nov 2000). See also Farisa Zarin, Sovereign Debt, What happens if a Sovereign
Defaults, Moodys Investors Service, Special Comment (July 2000), available at
-3-
Despite the favorable judicial decision obtained, Elliott was still faced with the
traditional problem of suing a sovereign, namely, the practical impossibility of attaching
the sovereigns assets in order to obtain payment. Neither Peru nor the Banco de la
Nacion (considered as an agency or instrumentality of Peru3) had property that could
be attached in the US. In response to this situation, Elliott Associates tried to intercept
and attach the Peruvian funds that were being transferred internationally for the payment
of those creditors who had agreed to the Brady Plan debt restructuring.
Elliotts first attempt involved a restraining order obtained against the New York
Fiscal Agent for the Peruvians Brady Bonds (The Chase Manhattan Bank). This bank
was ordered to retain any money that it received from Peru to be used for the interest
payment of the Brady bondholders. The argument was that Chase was merely the agent
of Peru and, therefore, the latter was still the owner of the funds that would be
transferred. However, such a transfer never took place because Peru became aware of the
restraining order. Continuing with the legal strategy, Elliott sought ex parte to obtain an
order from a Belgium Court restraining Euroclear from either accepting money from Peru
or paying it to the Brady creditors. The request was initially dismissed by the Brussels
Commercial Court, but the decision was rapidly revoked by the Court of Appeals,
granting the restraining order according to the terms requested by Elliott. Given the risk
of defaulting in the payment of interest to its Brady creditors, Peru was left with no other
http://www.moodys.com/moodys/cust/research/venus/Publication/Special%20Comment/noncategorized_n
umber/57753.pdf (visited on December 31, 2001).
3
In this case, all parties agreed that Banco de la Nacion was an agency or instrumentality of Peru. See
Elliott Assocs., L.P. v. Banco de la Nacion. 2000 U.S. LEXIS 14169 (S.D.N.Y. Sept 29, 2000), at 8.
-4-
alternative but to settle the controversy, so that the restraining order was not judicially
contended.
Elliotts victory in Brussels was fundamentally based on the argument that Peru
was attempting to make payments in violation of a principle of equal treatment (pari
passu clause) among foreign creditors, and was trying to use the Euroclear System to
achieve that objective. After analyzing the argument put forward by Elliott, the Court of
Appeals in Brussels expressly reached such a conclusion arguing that the pari passu
clause contained in the basic agreement that governs the repayment of the foreign debt of
Peru in effect provides that the debt must be repaid pro rata among all creditors.
Such an interpretation was defended by Professor Andreas Lowenfeld, whose

opinion was submitted to the Courts in Belgium. According to Lowenfeld, the pari passu
clause means that, if there is not enough money to pay all creditors in full, the debtor
cannot discriminate amongst creditors, paying some of them in full and leaving others
unpaid; in such a situation, all creditors must be paid pro rata.
Although there is no clear idea about what the real effects of the Brussels decision
are and what its consequences will be in the sovereign debt context, it has been suggested
that it will definitely strengthen the position of holdout creditors. Holdout creditors have
been a major problem for sovereign debt restructuring since the beginning of the nineties,
when the international financial architecture for sovereign borrowing changed from
syndicated bank loans to sovereign bonds. The new bond-based structure led to the
-5-
creation of a secondary market for such instruments and, consequently, to an exponential

growth in the number of bondholders. Due to the NY law applicable to most of them,
individual bondholders are not obliged to negotiate restructurings of the debt or to accept
the new terms of an exchange offer. It has been judicially recognized that those
bondholders are entitled to keep their original instruments and that the sovereign remains
beholden under the old terms. In practice, however, the possibility of holdout creditors
obtaining payment on their old instruments was very remote, because of the US Foreign
Sovereign Immunities Act restrictions. It is precisely in this area that the Brussels
decision will allegedly play a significant role.
Commentators have suggested that such a decision is one of the most important
weapons given to holdout creditors to defend against sovereigns and the majority of
creditors. It has been predicted4 that it will cause serious disruptions in sovereign debt
restructurings and, consequently, it will enhance global financial instability. If those
predictions turn out to be true, then it seems to be extremely urgent to implement an
international bankruptcy system for sovereign countries or any other legal mechanism
which can cause an orderly restructuring of the sovereign debts. However, such
predictions are based on the assumption that the Brussels decision represents a definite
and final conclusion of law, which will be used as a precedent in Belgium and will
probably influence the interpretation of the debated issue in other jurisdictions. It is
specifically this aspect of the controversy that this paper intends to address.
See G. Mitu Gulati & Kenneth N. Klee, Sovereign Piracy, The Business Lawyer, Vol. 56, February 2001,
at 636.
-6-
The focus of this paper is on trying to determine what the real legal effects of the
Brussels decision are. The first part is aimed at analyzing the substantive part of the
Brussels decision. It has been held that it is not clear if Elliotts strategy would survive
legal challenge in future cases. So this part of the paper is intended to clarify such an
issue. The interpretation of the meaning of the pari passu clause in the sovereign debt
context is explored in depth. The paper tries to identify the legal meaning of such a clause
and to determine if there is any divergence when compared with the general
understanding of the clause in the market. Since the interpretation of the pari passu
clause has to be made in light of the laws governing the debt agreement wherein such a
clause is included, the analysis basically focuses on US law, with certain specific
references to English law.
In the second part of this paper, the controversy is explored from a formal
perspective; the paper tries to find answers to the following questions: Does the Brussels
decision represent a firm and definite conclusion of law? How important are the
conclusions stated in a decision on an ex parte motion? Did the Brussels Court really
arrive at a final conclusion of law on the issue under scrutiny? Will such a decision be
used as a precedent for mandatory observance in Belgium?
The outcome of this paper will help determine whether the Brussels decision
represents a real threat to the financial stability of the global sovereign debt market and
whether, therefore, it may be used as an argument to support the creation of an
-7-
international bankruptcy procedure for sovereign debtors or the implementation of any

alternative proposal.
II
THE ELLIOTT CASE: FACTUAL BACKGROUND

AND POST-JUDGMENT LEGAL STRATEGY
1.
What exactly happened?
In October 1995, Perus government publicly announced its Brady deal, after the
Bank Advisory Committee agreed to restructure Perus defaulted commercial bank loans,
in order to exchange such credits for Brady Bonds5. Three months after such an
announcement, Elliott, a New York-based vulture fund, began purchasing 1983 Letter
Agreements of Banco de la Nacion (hereinafter referred to as BN) and Banco
Popular del Peru, which had been guaranteed by Peru6. Between January and March of
1996, Elliott acquired a total of US$20.7 million (face value) of such commercial bank
loans. This debt was acquired at the distressed price of about US$11.4 million7. It is
See Merrill Lynch Report, Debt Restructuring: Legal Consideration. Impact of Perus Legal Battle and
Ecuadors Restructuring on Nigeria and Other Potential Burden-Sharing Cases, October 30, 2000.
Available at http://www.emta.org/keyper/linden1.pdf (visited on March 10, 2002).
6
See International Monetary Fund, Policy Development and Review and Legal Departments, Involving the
Private Sector in the Resolution of Financial Crises Restructuring International Sovereign Bonds, at 12.
Available at http://www.imf.org/external/pubs/ft/series/03/IPS.pdf (visited on March 10, 2002).
7
See Ambassador Philip S. Kaplan, Patton Boggs LLP, Memorandum prepared by Perus outside counsel
addressed to Perus Minister of Economy, Mr. Carlos Bologna, about the Elliott Associates Settlement
(hereinafter
referred
to
as
the
Kaplan
Memorandum),
at
1.
Available
at
http://www.mef.gob.pe/Caso_E/frame_pdf.htm (visited on March 13, 2002). See also Ministry of Economy
and Finance of Peru, Final Report about the Elliott Associates case, (hereinafter referred to as the MEF
-8-
interesting to notice that Elliotts purchases occurred after the Brady deal was agreed and
only two weeks after another creditor, Pravin Banker, successfully litigated against Peru8.
The timing of such acquisitions allegedly suggested Elliotts intention to litigate9.
Immediately after completing its acquisition, and while Peru was still negotiating with
the Bank Advisory Committee the term sheet of its Brady deal, Elliott started making
demands for full payment.
In October 1996, Peru issued instructions to execute the Brady Exchange

Agreement. As expected, Elliott refrained from participating in the proposed Exchange
Agreement. Instead, on October 8th, 1996, Elliott filed a suit against Peru and BN and
also filed an ex parte motion for prejudgment attachment. It was clear that Elliotts
intention was to attach the collateral for the Brady closing, which would have caused a
serious impact in Perus ability to close the Brady deal10. However, the Court denied
Elliotts motion for attachment. The Court also denied a summary judgment motion
subsequently filed by Elliott.
With the collateral held in trust for the Brady bond holders and hence protected
from Elliotts attempts to attach such assets, the Brady Exchange Agreement closed on
March 7th, 1997. The closing was achieved upon Perus verbal promise not to provide
Final Report), at 1. Available at http://www.mef.gob.pe/Caso_E/frame_pdf.htm3 (visited on March 13,
2002).
8
See Memorandum prepared by Perus outside counsel, Mr. Mark A. Cymrot, from Baker & Hostetler
LLP, addressed to Perus Minister of Economy, Mr. Carlos Bologna, about External Debt Litigation
(hereinafter referred to as the Cymrot Memorandum), at 4. Document available at
http://www.mef.gob.pe/Caso_E/frame_pdf.htm (visited on March 10, 2002).
9
See Merrill Lynch Report, supra note 5, at 2.
-9-
any extra benefits to hold out creditors. Peru stood on its word and refused all Elliotts
continuous demands for full payment11. As a consequence, both parties became involved
in a lengthy pre-trial discovery process, trial finally held in March 1998, one year after
the Brady deals closing.
In August 1998, the District Court for the Southern District of New York adopted
a decision in Perus favor, after finding as a fact that Elliott purchased the Peruvian debt
with the intent and purpose to sue and did not seriously consider alternatives to
bringing an action12. Accordingly, the court held that Elliots assignment contracts -whereby it acquired the Peruvian distressed debt-- violated 489 of the New York
Judiciary Law, which makes unlawful the acquisition of debt with the intent and for the
purpose of bringing an action or proceeding thereon. This decision represented the first
time a debtor succeeded in proving the champerty defense at trial13.
However, in September 1998, Elliott filed an appeal arguing that the champerty
doctrine did not apply14. The United States Court of Appeals for the Second Circuit
agreed and, therefore, reversed the judgment of the District Court. In its decision, dated
October 20 th, 1999, the Court of Appeals held that 489 of the New York Judiciary Law
is not violated when the accused partys primary goal is found to be satisfaction of a
10
Perus Brady restructuring program was made in the context of an IMF-supported program, whereby
IMF funds were used to help finance the acquisition of collateral for the new instruments. See International
Monetary Fund, supra note 6, at 12.
11
See MEF Final Report, supra note 7, at 4 (Perus strategy was to frustrate Elliott in the litigation,
demonstrate that it could not collect from Peru without an agreement, and eventually force Elliott to accept
something close to Brady terms, as had successfully been done in the Pravin Banker case).
12
Elliott Assocs. , L.P. v. Banco de la Nacion, 194 F.3d 363, 366 (2d. Cir. 1999)
13
See Cymrot Memorandum, supra note 8, at 4.
14
-10-
valid debt and its intent is only to sue absent full performance15. It was found that
Elliotts primary goal was to satisfy a valid debt and not necessarily to litigate16. The
Court of Appeals remanded the case to the trial court only for the purpose of calculating
damages.
Given the favorable decision obtained by Elliott from the Court of Appeals, on
November 2nd, 1999 the trial court granted Elliott, upon its request, an attachment and
restraining order over the commercial property of Peru and BN. Despite Elliotts success
in obtaining this post-judgment order, in practice it gained very little from that since there
was virtually no property held by Peru and/or BN in New York17. Elliott then requested
that such restraining orders were applicable to all foreign branches of New York banks
served by such orders. The trial court rejected such a petition on January 18, 2000 and,
therefore, Elliott was prevented from relying on one single order of attachment to catch
any transfers through branch offices18.
On June 22nd, 2000, the Court for the Southern District of New York finally
rejected Perus defenses and ordered judgment in favor of Elliott. In its decision, the
court authorized Elliott to recover from the defendants the sum of US$55,660,831.56,
15
Elliott Assocs. v. Banco de la Nacin, 194 F.3d 363 (2d Cir. 1999). Available at
www.tourolaw.edu/2ndCircuit/October 99/98-9268.html , visited on December 12, 2001. See also Samuel
E. Goldman, Mavericks in the Market: The Emerging Problem of Hold-Outs in Sovereign Debt
Restructuring, 5 UCLA J. Intl L. & Foreign Aff. 159, at 15 (The court found that the decision to bring
suit was incidental and contingent to the decision to purchase the debt. It was incidental as the primary
purpose was to receive payment, and it was contingent since the decision to litigate came only after the
debtors decision not to pay).
16
See Merrill Lynch Report, supra note 5, at 2. See also Melissa I. Hoffman, Second Circuit Clarifies New
York Law on Enforcement of Debt Instruments, Weil, Gotshal & Manges LLP - Bankruptcy Bulletin,
February 2000, available at http://www.weil.com/weil/sitesearch_frames.html (visited on March 16, 2002).
17
-11-
representing the principal amount and past due interests up to such date, and authorized
the recovery of post judgment interest as well. The court also made it clear that such
amount did not include the costs and expenses incurred by Elliott in connection with the
enforcement of its rights. Additionally, the court authorized the execution of the decision
against any property of the defendants that is used for a commercial activity in the United
States19.
Under such circumstances, Peru was facing a very complicated situation by

September 2000. Both Peru and BNs commercial assets were subject to the attachment
order referred to above. Peru was faced with serious operational difficulties and, hence,
was forced to design a complete new strategy and procedure to channel and receive funds
derived from international loan agreements and other commercial transactions, as well as
to comply with the payment of international financial obligations. Thus, international
funds were received by and transferred from Peru through financial centers other than
New York20. The scenario was aggravated by Elliotts renewed efforts to attach
defendants property abroad, especially in Germany, Holland, Belgium, England,
Luxembourg and Canada. However, such strategy failed to find any significant property
to be attached.
Being aware that the first Peruvian Brady coupon following the June 22nd decision
would fall due on September 7th, 2000, Elliott sought to attach Perus interest payment to
18

See Elliott Associates, L.P., v. Banco de la Nacion, 2000 WL 1449862 S.D.N.Y. Sep 29, 2000.
20
See MEF Final Report, supra note 7, at 1.
19
-12-
its Brady bondholders21. According to the terms of its Brady deal, in order to comply
with such payments, Peru was obliged to deliver US$80 million to the Chase Manhattan
Bank (hereinafter referred to as Chase), on September 6th, 2000. After receiving such
funds, Chase, acting as the fiscal agent for the Brady bonds, would proceed to make the
payment of the interests basically through three clearinghouses: Depository Trust
Company (DTC) of New York, Euroclear of Belgium and Clearstream of Luxemburg. As
part of Elliotts strategy to intercept such funds, it obtained ex parte restraining orders
against Chase, DTC, Morgan Guaranty Trust Company of New York (hereinafter
referred to as Morgan) and Bank of New York. The order was notified to the latter in its
role as cash custodian of Euroclear and to Morgan as operator of Euroclear.
Simultaneously, Elliott initiated legal proceeding in three different jurisdictions: England,
Belgium and Luxemburg, seeking to block the interest payment through the European
clearinghouses referred to above22. It was clear then that Elliots strategy was twofold:
first, trying to attach the funds at the level of the fiscal agent; second, capturing funds at
the level of the clearing houses.
However, the first part of Elliott strategy failed to achieve its objective when
Peru, presumably informed that a restraining order had been served upon Chase23, did not
deliver the funds as agreed originally in the Brady plan. Notwithstanding having
frustrated Elliotts first plan, Peru failed to pay the corresponding interest to its Brady
bond holders on September 7th, 2000. Therefore, according to the terms of the agreement
governing the Brady instruments, Peru was granted a grace period of 30 days. So, if the
21
22
See Cymrot Memorandum, supra note 8, at 5. See also Merrill Lynch Report, supra note 5, at 2.
See MEF Final Report, supra note 7, at 3. See also Cymrot Memorandum, supra note 5, at 5.
-13-
interest payment was not made before the end of the grace period, Peru would have
legally incurred in formal default and, hence, triggered the right of all its Brady
bondholders to demand full payments of their securities, which represented a total
exposure of up to US$3,837 million24.
Constrained by time pressure, Perus legal advisors25 devised a multi-level

strategy26 in order to have the Brady interests paid before October 7th, 2000. Initially,
they tried to find an alternative way to comply with the interest payments through a route
other than Chase, therefore avoiding Elliotts attachments attempts. This initiative was,
however, unsuccessful. As explained by Perus outside legal counsel, with DTC blocked
by Elliotts restraining order, and most of the international banks and clearinghouses
reluctant to cooperate due to fears of new lawsuits by Elliott27, the possibility of finding
an alternative route for the interest payments was quite complicated: Elliott was very
active in trying to block the Euroclear route, and the other natural alternative,
Clearstream, agreed to participate but only in return for an indemnity from Peru28. In
spite of such difficulties, there were some rumors suggesting that Peru had seemingly
secured the backing of the Bank of International Settlements to go around Elliott. This
Switzerland-based institution is, as most international organizations, immune from
23

25
Perus legal advisory team in this particular matter was lead by Mr. Mark A. Cymot, from Baker &
Hostetler LLP, and Mr. Roger Thomas, from Cleary, Gottlieb, Steen & Hamilton.
26
27
See Id., at 7.
28
See Id., at 7. (Clearstream, the clearinghouse in Luxemburg, however, agreed to pay about 40 percent of
the bondholders in return for an indemnity from Peru. Clearstream also held open the possibility that other
bondholders could transfer their accounts to Clearstream to receive payment. The indemnity involved some
risk of liability to Peru).
24
-14-
lawsuits and attachments 29. However, due to reasons that have not been publicly revealed
by Peru, this alternative route was never put in place. Presumably, the terms and
conditions of the Peruvian Brady bonds might have included a detailed mechanism for
the payment of interest and capital, whose non compliance would have been considered
as an event of default. This possibility, nonetheless, is merely speculative since it has not
been confirmed.
In addition, Perus advisors also considered the filing of motions challenging

Elliotts restraining orders and, most specifically, the possibility of posting with the court
a security bond equal to the amount of the judgments in order to have such orders
withdrawn30. Notwithstanding its appeal, this course of action was not followed because
it was considered that giving Elliott a security bond would have reduced Perus leverage
at the negotiation table31.
On September 21st and 22nd, 2000, two Courts from New York granted Elliott ex
parte restraining orders whereby, if a deposit or transfer occurred, Elliott would have the
right to serve additional restraining orders on Chase, DTC, Morgan and the Bank of New
York. Such orders were specifically aimed at avoiding the payment of the Brady
interests. Arguing that the orders appeared to reach beyond the US in violation of the
29
See Carol S. Remond, Peru Settles Creditor Dispute with Elliott for US$58M, Dow Jones Newswires.
Available at http://www.emta.org/ndevelop/djnews.html (visited on March 21st, 2002).
30
This is the same approach taken by Peru in the Pravin Banker case.
31
See Cymrot Memorandum, supra note 8, at 7. See also Kaplan Memorandum, supra note 7, at 1.
-15-
restrictions imposed by the decision of June 22nd, 2000, Peru, as well as Morgan and
Chase, challenged the referred orders32.
Also on September 22nd, Elliott filed an ex parte motion before the Commercial
Court of Brussels, Belgium, in order to prevent Euroclear from accepting or paying out
cash from Peru, intended to pay interest on the Brady bonds33. Elliotts petition was
aimed at enjoining Morgan, for reasons of absolute necessity, to instruct its Cash
Correspondents not to have any amounts credited to their accounts that originate from
the Republic of Peru or Banco de la Nacion, including amounts designed to pay interest
under the Brady bonds and, in case such funds had already been received, to instruct
such Cash Correspondents to block such funds and also not to take any action that
would result in such funds being distributed in any manner within the Euroclear
system34. Elliotts motion was denied because the Court considered that the tests of
absolute necessity and extremely urgent had not been fully met35. Not satisfied with
the decision, Elliott appealed in September 25th.
On September 26th, 2000, one day after Elliotts request for appeal was filed, the
8th Chamber of the Brussels Court of Appeals reversed the Commercial Courts decision
and, hence, ordered the restraining order according to the terms requested by Elliott. As
mentioned before, the key argument presented by Elliott, and recognized as such by the
32

34
See Elliott Assocs. L.P., General Docket No. 2000/QR/92 (Court of Appeals of Brussels, 8th Chambers,
Sept. 26, 2000) Unofficial translation (hereinafter referred to as Brussels Decision Unofficial
Translation), at 1.
35
See Id., at 2.
33
-16-
Brussels Court of Appeals, was that Peru was trying to use Euroclear to violate the
principle of equal treatment of creditors, allegedly derived from the pari passu clause
contained in the original loan agreements held by Elliott36.
Under the pressure of having been put in a position where it might be forced to
default in its interest payments, Peru settled the controversy with Elliott on September
29th. Peru did no even wait until after the hearing that had been set to consider a request
made by Peru and Morgan to throw out the restraining orders affecting Morgan, Chase,
DTC and Bank of New York37. The practical effect of the Brussels decision was
determinant. Although the Brussels Court of Appeals decision could have been legally
attacked, default in the payment of the Brady interest was imminent. In consequence,
Peru was left with no other alternative but to negotiate a settlement with Elliott. Peru paid
US$58.45 million in total to Elliott and had all restraining orders lifted38. Thus, Peru was
able to comply with the payment of its Brady interest on October 5th, 2000.
2.
The Brussels Court of Appeals Decision
As mentioned before, the 8 th Chamber of the Brussels Court of Appeals issued the
decision under analysis (hereinafter referred to as the Brussels decision) on September
36
See International Monetary Fund, Involving the Private Sector in the Resolution of Financial Crises
Restructuring International Sovereign Bonds, supra note 6, at 12.
37
See Reuters Banking-Financial Services Report, Peru Settles With Hedge Fund For More Than US$58M,
available at http://www.mediaislandgroup.com/~financial/pilots/banking/STORIES/bank17.htm (visited
on March 21, 2002).
38
-17-
26th, 2000, reversing the Commercial Court decision which denied Elliotts request for a
restraining order against Euroclear.
According to the terms of the Brussels decision, Elliott challenged the

Commercial Court ruling by invoking the following arguments: (i) it has a claim of
more than US$55 million against the Republic of Peru and has obtained two enforceable
judgments from a New York judge; (ii) the Peruvian Republic attempts to make
payments in violation of a principle of equal treatment (pari passu clause) among foreign
creditors, whereby Elliott Associates is excluded, and tries to use the Euroclear system to
achieve that objective; and (iii) the requested measures are necessary to achieve that
objective and this is only possible by bringing an ex parte motion39.
In sum, the Court of Appeals understood Elliotts motion as one intended to

prevent that Peru would resort to using the possibilities offered by the Euroclear System
in order to make discriminatory payments in a legal environment that avoids the effect of
the American judgments40. The court concluded that Elliott had an enforceable claim
against Peru and that the latter was trying to escape the enforcement thereof by making
an interest payment () via Euroclear41. Obviously, this rationale was based on the
premise that Peru was contractually barred from paying one group of creditors before
paying Elliott42.
39
Brussels Decision Unofficial Translation, supra note 34, at 2.

Id.
41
Id.
42
See Gulati & Klee, supra note 4, at 636.
40
-18-
To reach that conclusion, the Court of Appeal had to analyze and interpret what
was the real and effective content and meaning of section 11(c), the pari passu clause, of
the Guaranty dated as of May 31, 1983, whereby Peru had guaranteed the 1983 Letter
Agreements of BN and Banco Popular del Peru. The clause under scrutiny reads
literally as follows43:
Representations and Warranties. - The Guarantor [i.e., the

Republic of Peru] represents and warrants as follows: ()
(b)
This Guaranty is the legal, valid and binding
obligation of the Guarantor, enforceable against the
Guarantor in accordance with its terms.
(c)
The obligations of the Guarantor hereunder do rank
and will rank at least pari passu in priority of
payment with all other External Indebtedness of the
Guarantor, and interest thereon.
The interpretation given by the Court of Appeals to the clause in question

concurred with the argument put forward by Elliott. The court expressly held that it
appears from the basic agreement that governs the repayment of the foreign debt of Peru
that the various creditors benefit from a pari passu clause that in effect provides that the
debt must be repaid pro rata among all creditors. This seems to lead to the conclusion
that, upon an interest payment, no creditor can be deprived of its proportionate share44.
The ruling is very straightforward on this point and does not analyze the legal
matter in greater detail. It seems that the Court of Appeals just took for granted the
argument presented by Elliott and did not worry about exploring other possible meanings
43
See Declaration of Professor Andreas F. Lowenfeld, before the Southern District Court of New York
(hereinafter referred to as the Lowenfeld Declaration), page 8.
-19-
of the referred clause. The court assumed that the pari passu clause represents no more
than a pro rata rule and, therefore, that Elliot had a legal right to be protected against a
serious and real threat, namely, the payment of interest to other creditors. However, the
Court of Appeals never mentioned nor explained the legal argument upon which such an
assumption is based. It was totally convinced by Elliotts arguments, which in turn, were
vividly explained by the New York University Professor, Andreas F. Lowenfeld, in his
declaration before the Southern District Court of New York45.
Strategically speaking, the Brussels Court of Appeal decision (hereinafter referred

to as the Brussels decision) played a crucial role in the final outcome of the Elliott case.
It could be argued that this decision was the one which finally forced Peru to accept the
terms requested by Elliott at the negotiation table. Once the Brussels Court of Appeals
issued the restraining order against Euroclear, there was, apparently, no legal remedy that
could have allowed Peru to pay its Brady interests before the end of the grace period.
Consequently, Peru settled the case and the referred order was not appealed.
3.
The Opinion of Professor Andreas F. Lowenfeld
In his declaration, Lowenfeld explained that Elliott claims that it is entitled, under
section 11(c) of the 1983 Guaranty, to be treated with respect to payment of principal
and interest at least on equal terms with all other External Indebtedness46, and therefore,
44
Brussels Decision Unofficial Translation, supra note 34, at 3.

As mentioned by Gulati and Klee, Professor Lowenfelds opinion was also submitted in the Brussels
case. See Gulati & Klee, supra note 4, at footnote 12.
46
Lowenfeld Declaration, supra note 43, at 6.
45
-20-
any payment to the Brady bondholders and not to Elliott would constitute a preferential
arrangement contrary to the terms of section 11(c)47. After analyzing Elliott request,
Lowenfeld concluded thus:
my conclusion is that the pari passu clause in the

Guaranty entitles each Lender to share equally and ratably
with any other holder of External Indebtedness as defined. I
have no doubt that the Brady Bonds described above
constitute External Indebtedness of the Republic of Peru.
Accordingly, if the Republic pays principal or interest to
holders of the Brady Bonds or some of them, it is obligated
to make payment of a proportionate amount to all holders
of Affected Debt incurred in the Letter Agreements,
including Plaintiff Elliott Associates, L.P., and that
obligation is enforceable in this court if necessary by an
injunction48.
Lowenfeld explains that there is no difficulty in understanding the literal meaning

of the term pari passu. He refers that such a term comes from the Latin noun
passus, which means step, pace, stride, and from the Latin adjective par, meaning
equal or like. His conclusion is also based on the Websters New International
Dictionary49, which defines the term in question as with or at an equal pace; in or to an
equal proportion, degree, place, rank, or title, as well as on the Blacks Law
Dictionary50, which defines pari passu as By an equal progress; equably, ratably;
without preference. Used specially of creditors who, in marshalling assets, are entitled to
receive out of the same fund without any precedence over each other. Accordingly,
under this literal approach to the meaning of the aforementioned clause, Lowenfeld
47
Id.
Id., at 7.
49
See Websters New International Dictionary. Second Edition, unabridged, 1951.
48
-21-
concludes that any debt under the Letter Agreements is to have at least equal rank with
all other Peruvian External Indebtedness51.
Continuing with his explanation, Lowenfeld argues that the fact that sovereigns
do not go bankrupt and cannot be liquidated does not mean that the pari passu clause has
no sense or direct effect when applicable to sovereigns. Based on the opinion of an
English commentator, William Tudor John, Lowenfeld concludes that the pari passu
clause is of the greatest importance in governmental loan agreements because it is
primarily intended to prevent the earmarking of revenues of the government towards a
single creditor, the allocation of foreign currency reserves, and generally against legal
measures which have the effect of preferring one set of creditors against the others or
which discriminate between creditors52.
Additionally, Lowenfeld expresses his disagreement with all those academic

articles53 which suggest that the pari passu clause --in the sovereign debt context-- does
not exactly mean what it literally says, or that it cannot be relied on by lenders if
disregarded or violated by borrowers. In Lowenfelds opinion, the pari passu clause does
50
See Blacks Law Dictionary, Sixth Edition, 1990.

It has not been possible to verify the textual definition of the term External Indebtedness in the Letter
Agreements mentioned above, but according to what Professor Lowenfeld mentions in his Declaration, it
seems that such a definition was included in Section 1 of the Letter Agreements, covering any other portion
of the debt issued under said Letter Agreements and also any bonds or other evidence of debt issued or
guaranteed by Peru, including the Brady bonds.
52
See William Tudor John. Sovereign Risk and Immunity under English Law and Practice, in Robert S.
Rendell, ed., International Financial Law, Vol 1, p. 71 at 95 (2d ed. 1983). See also Lowenfeld
Declaration, supra note 43, at 10.
53
Lowenfeld makes express reference to an article written by Lee C. Buchheit, The Pari Passu Clause sub
specie aeternitatis, 10 Intl Financial L. Rev. No. 12, p. 11 (Dec. 1991), where the author mentions that
The fact that no one seems quite sure what the pari passu clause really means, at least in a loan to a
sovereign borrower, has not stunted its popularity among drafters of loan agreements and debt restructuring
agreements.
51
-22-
really mean what it says: a given debt will rank equally with other debt of the borrower,
whether that borrower is an individual, a company, or a sovereign state54. The logical
and legal basis for this conclusion is clearly explained by Lowenfeld as follows:
A borrower from Tom, Dick and Harry cant say I will

pay Tom and Dick in full, and if there is anything left over
Ill pay Harry. If there is not enough money to go around,
the borrower faced with a pari passu provision must pay all
three of them on the same basis:
Suppose, for example, the total debt is $50,000 and the
borrower has only $30,000 available. Tom lent $20,000 and
Dick and Harry lent $15,000 each. The borrower must pay
three fifths of the amount owed to each one i.e., $12,000
to Tom, and $9,000 each to Dick and Harry. Of course the
remaining sums would remain as obligations of the
borrower. But if the borrower proposed to pay Tom
$20,000 in full satisfaction, Dick $10,000 and Harry
nothing, a court could and should issue an injunction at the
behest of Harry. The injunction would run in the first
instance against the borrower, but I believe (putting
jurisdictional considerations aside) to Tom and Dick as
well55.
The final argument put forward by Lowenfeld notes that the same District Court
and the Court of Appeals have already decided on the issue under analysis when
resolving a closely analogous case, namely Alliance Bond Fund, Inc. v. Grupo Mexicano
de Desarrollo, S.A.56. In this case, the Mexican borrower and its guarantors were enjoined
from making payments to some creditors while the plaintiffs, who were the beneficiaries
of a pari passu clause, were going to be left out. Despite the fact that this case was finally
reversed by the U.S. Supreme Court --on the ground that prejudgment injunctions
54
See Lowenfeld Declaration, supra note 43, at 11.

Id., at 12.
56
143 F.3d 688 (2d Cir. 1998)
55
-23-
preventing the payment of money were not authorized in the Federal Rules of Civil
Procedures and were inconsistent with traditional equity jurisprudence-- Lowenfeld
argues that its rationale may still be applicable to the Elliott case, for there being a final
judgment favoring the plaintiff already57.
Based on the aforementioned arguments, Lowenfeld concludes that Section 11(c)

of the 1983 Guaranty creates a binding and continuing obligation to treat all covered
borrowers equally without discrimination, including Elliott.
III
INTERPRETING THE PARI PASSU CLAUSE
1.
An Alternative Interpretation?
On the basis of its historically well recognized literal meaning, commentators

have claimed that the essence of the pari passu provision is that it is an undertaking of
the borrower to maintain parity between its creditors58. In the same line of thought, it
has been said that the very purpose of this clause () is to ensure equal treatment for all
unsecured creditors59. In other words, the primary objective of the clause is to ensure
57

Ibrahim F. I. Shihata, The World Bank Legal Papers, Chapter 12 (2000), at 303.
59
Esin Taboglu, The International Debt Problem: Legal Problems of Restructuring Sovereign Private
Debt. Paper submitted to professor Phillip Wellons in satisfaction of LLM Written Work Requirement.
Harvard (1990), at 42.
58
-24-
that the borrower has not conferred priority to any other unsecured creditor60. Parity or
equal treatment between creditors is clearly the main principle upon which the legal
significance of the pari passu clause is conceived. However, equality seems to be a very
broad and abstract concept that has been differently understood and interpreted by
practitioners and academics when trying to elaborate a precise definition of the clause
under analysis.
As a result, there is not a general consensus on the definition of the pari passu
clause. It has been held that the pari passu clause in a loan agreement is a covenant
under which the borrower agrees that all of its payment obligations under the agreement,
currently and in the future, will rank at least equally with all of its other existing and
future unsecured debts61. Under this definition, the main focus of attention must be in
determining what the phrase will rank at least equally exactly means.
In a more comprehensive definition, the clause under consideration has been

defined as a covenant whereby it is agreed that the payment obligations of the borrower
under the agreement constitute unconditional general obligations of the borrower and will
rank at least pari passu in priority of payment with all other external indebtedness of the
borrower62. This definition makes it clear that the equal ranking amongst creditors is
exclusively in relation to priority of payment. Nonetheless, the term in reference is still
60
Ravi C. Tennekoon, The Law & Regulation of International Finance, Butterworth (1991), at 89.
See UNITAR Online Resource Center, Training and Capacity Building Programmes in the Legal
Aspects of Debt, Financial Management ad Negotiation, Glossaries. Available at
http://www.unitar.org/dfm/Resource_Center/TrainingPackage/TP10/GlossaryP.htm (visited on March 17,
2002).
62
Ibrahim F. I. Shihata, supra note 58, at 303.
61
-25-
highly confusing given the various and different interpretations that can be put forward
with regard to the phrase to rank at least pari passu in priority of payment.
Equality in priority of payment is evidently the key term in order to understand

the practical application and effects of the pari passu clause. But, what does priority of
payment effectively mean? It is precisely in answering this question where the final
divergence in the Elliott case arose: was such a term related or not to a pro rata payment?
As seen above, the interpretation suggested by Lowenfeld is straightforward and

compelling: pari passu means that all payments must be made on a pro rata basis, that is,
that such a clause entitles its beneficiary to share equally and ratably with any other
external indebtedness. And Lowenfeld arrives at such a conclusion without making any
distinction as to whether the borrower is an individual, a company, or a sovereign. Thus,
any beneficiary of the pari passu clause has the right to share equally and ratably63
with any other external indebtedness. Hence, if the borrower makes payments to just one
or some of its creditors, the beneficiaries of the referred clause have the right to be paid a
proportionate amount64, meaning, on a pro rata basis.
It has been difficult to find commentators backing expressly what Lowenfeld

suggested. Following Tudor Johns opinion --in the context of governmental loan
agreements (quoted above)--, Vinok K. Agarwal seems to agree with such a particular
interpretation as well. After mentioning that the pari passu clause requires that the
63
64
Lowenfeld Declaration, supra note 43, at 7.

Id.
-26-
borrower shall treat all the unsecured lenders equally, the latter argues that the borrower
will not give preference to any particular lender in the matter of recovery of loan
amount65. The same author also states that, as a direct effect of the pari passu provision
and in connection with external debt only, the lender shall not be discriminated in the
matter of availability of assets66.
Also in the same line of thought, Brian Semkow argues that, in the context of
sovereign borrowing, the pari passu provision will prevent sovereign borrowers from
discrimination against the lending banks in the payment of creditors out of general
revenues or foreign currency reserves67. Similarly, Philip Wood agrees with this idea
when related to the sovereign context. The author argues that the referred clause bears a
different construction in the case of a sovereign state. Since the latter cannot go bankrupt
nor can be liquidated --notes Wood-- the hierarchy on force dissolution is not the point68.
The commentator then concludes, following what was previously mentioned by Tudor
John, as follows:
The clause is primarily intended to prevent the earmarking

of revenues of the government or the allocation of its
foreign currency reserves to a single creditor and generally
is directed against legal measures which have the effect of
65
Vinod K. Agarwal, Negotiation of Specific Clauses of Loan Agreements, available at

http://www.unitar.org/dfm/Resource_Center/Document_Series/Document10/15Covenants.htm (visited on
March 9, 2002)
66
Id.
67
Brian W. Semkow, Syndicating and Rescheduling International Financial Transactions: A Survey of the
Legal Issues Encountered by Commercial Banks, 18 Intl Law. 869, 899 (1984).
68
See Philip Wood, Law and Practice of International Finance, volume 2, International Business & Law
Series, 1984, at 6-23.
-27-
preferring one set of creditors over the others or

discriminating between creditors69
That also seems to be what Derek Asiedu-Akrofi suggests. This author analyzes
the effects of a sovereign debt repurchase transaction in the light of a pari passu
provision and concludes as follows:
[T]he sale of the debt at a discount of the true market

value arguably does not confer any special benefit on the
creditor banks, as sale at discount entails considerable
losses. Whether or not such an argument can withstand
legal challenge, however, remains doubtful. Once a creditor
agrees to accept a lesser sum in substitution for the full
value of the original debt, it is unlikely that it may
successfully plead that it has not received a
disproportionate payment while the other creditors have not
been paid pro rata. Such payment inevitably confers
preferential treatment on the creditor(s) engaging in that
transaction, thus infringing the mandatory prepayment and
pari passu clauses.70
Notwithstanding the natural appeal of the Lowenfeld interpretation of the pari

passu clause, there are a number of commentators that believe that the real meaning of
the clause in the sovereign context is not so clear. Also, international organizations have
made public their skepticism about the legality of the argument put forward by Elliott.
The International Monetary Fund, for instance, has opined that [t]he legal bases upon
69
Id. But see Philip Wood, Project Finance, Subordinated Debt and State Loans, Sweet & Maxwell,
London 1995, at 165 (the same author mentions that [i]n the state context, the meaning of the clause is
uncertain because there is no hierarchy of payment which is legally enforced under a bankruptcy regime.
Probably the clause means that on a de facto inability to pay external debt as it falls due, one creditor will
not be preferred by virtue of an allocation of international monetary assets achieved by a method going
beyond contract.
70
Derek Asiedu-Akrofi, Sustaining Lender Commitment to Sovereign Debtors, Columbia Journal of
Transnational Law, 1992. The author continues referring that [i]n order to ensure that such breaches do
not occur, it is necessary for the debtor country/buyer to extend participation in the transaction to all the
creditors. The debtor government also should seek and obtain waivers of the mandatory prepayment, pari
passu and sharing clauses in existing loan agreements. In this way, banks that refuse to participate in the
-28-
which Elliott litigated its case --particularly its reliance on the pari passu clause-- are
somewhat controversial71.
Moreover, it has even been held that, indeed, the Lowenfeld interpretation is
precisely what the clause does not mean72. According to Gulati & Klee, the main
objective of the pari passu clause is to ensure that the borrower does not have, nor it will
subsequently create, a class of creditors whose claims will rank senior in priority to the
lending claims of the current creditors73. The referred authors explain that the meaning
of such a clause in the corporate debt context is that no other lender will enjoy a priority
in a liquidation distribution of the borrowers assets74.
The argument put forward by the aforementioned authors --regarding the

interpretation of the provision in the corporate context-- finds support in Wood. He
expressly mentions that the undertaking is to be construed as a commitment or a
warranty that on an insolvent liquidation or a forced distribution of assets unsecured
creditors will be entitled to pro rata payment and also that, on the occasion of judicial
compromises or agreed debt settlements, the bondholder will be not discriminated
against75. Also supporting this restrictive construction is Lee C. Buchheit, who explains
that the interest of the lenders in including a pari passu provision in their contracts is that,
transaction may be stopped from making claims on the proceeds accruing to those banks engaging in the
debt repurchase transaction.
71
See International Monetary Fund, supra note 6, at 12. See also Anne Krueger, International Financial
Architecture for 2002: A New Approach to Sovereign Debt Restructuring, available at
http://www.imf.org/external/np/speeches/2001/112601.htm (visited on March 9, 2002). (It is not clear if
Elliotts strategy would survive legal challenge in future cases).
72
Gulati & Klee, supra note 4, at 639.
73
Id.
74
Id.
-29-
in case of a bankruptcy or compulsory distribution of the borrowers assets, the lenders

do not wish to be surprised by the appearance of other creditors holding claims against
the debtors state that rank senior to their own76.
This restrictive interpretation of the clause under analysis does not leave room for
Lowenfelds pro rata theory in the corporate context. The upshot is that corporate
borrowers subject to a pari passu provision can feel free to deal with and discharge their
indebtedness as they may deem more convenient to their interests. This outcome is made
clear by Wood, who expressly points out that the pari passu clause has nothing to do
with the time of payment of unsecured indebtedness since this depend upon contractual
maturity. The pari passu undertaking is not broken because one creditor is paid before
another77. Buchheit is even more explicit when explaining his position in the following
terms:
A lender who remains unpaid at a time when other

creditors are current on their loans may articulate his
grievance in terms of liberty, equality or fraternity, but he
should not invoke his pari passu covenant as the legal basis
for his disappointment. This provision assures the creditor
that its loan will not be subordinated to the claims of other
creditors in the event of the borrowers bankruptcy, but it
does not force the solvent borrower to make pro rata
payments to all its creditors78.
75
Philip Wood, supra note 68, at 6-23.

Lee C. Buchheit, The Pari Passu Clause Sub Specie Aeternitatis, 10 International Financial Law Review
No.12 (December 1991), at 11.
77
See Philip Wood, supra note 68, at 6-23. See also Philip Wood, supra note 69, at 165 (It does not mean
that one debt cannot be paid before another in time).
78
Lee C. Buchheit, How to Negotiate Eurocurrency Loan Agreements (2nd ed. 2000), at 83.
76
-30-
This idea of the pari passu provision being directly effective only in case of the
distribution of the borrowers assets due to insolvency or bankruptcy (in the corporate
context) has also received support from Joseph J. Norton. This author argues that the
provision in question has been designed to ensure the equal ranking of unsecured claims
on liquidation of assets to unsecured creditors on the borrowers insolvency79. He goes
even further explaining that the pari passu clause does not require concurrent or equal
payment prior to that time [borrowers insolvency], and does not restrict guaranteed loan
or setoffs80.
The main conclusion arrived at by the referred commentators, although referring

to the corporate context only, is of the greatest importance. Contrary to what Lowenfeld
argued in his Declaration, these authors make it clear that the pro rata argument cannot
be accepted out of the context of an insolvency or bankruptcy situation. But this rationale
does not seem to be that convincing when applied in the sovereign context. As it is
generally known, a sovereign country cannot legally go into bankruptcy, nor declare itself
insolvent81. This is clearly explained by Buchheit, who argues that [s]overeigns are not
subject to domestic bankruptcy regimes nor is it likely that a sovereigns assets can be
marshaled and distributed to creditors without the sovereigns consent82. In consequence
--concludes the author-- "when a sovereign promises in a loan agreement that the loan
79
Joseph J. Norton, International Syndicated Lending and Economic Development in Latin America: The
Legal Context, in Essays in International Finance & Economic Law No.9 (1997), at 43.
80
Id. (The author mentions that the pari passu clause prevents the borrower from assuming new debts
which subordinates the interests of the syndicated members).
81
See Philip Wood, supra note 68, at 6-23.
82
Lee C. Buchheit, supra note 76, at 11.
-31-
will rank pari passu with all of the sovereigns other external indebtedness, the lender is
not being told anything about where it will stand in a queue of bankruptcy creditors83.
Assuming the validity of the argument referred to above, what would then be the
purpose and exact meaning of the pari passu provision in the sovereign arena? Gulati &
Klee, after recognizing that there is no liquidation in the sovereign debt context84, explain
the significance of the pari passu clause in the sovereign context thus:
The pari passu clause works as a covenant by the

borrower that it will not bestow a legally senior priority
status on certain lenders. This protects against the
temptation for the sovereign to enact laws affecting the
legal ranking of creditors. Ranking pari passu therefore is
about insolvency payouts (in the corporate context) or
about the alteration of payment priorities by law (in the
sovereign context). It is an equal ranking, but it applies to
specific contexts85.
In accordance with the explanation provided by the referred authors, Buchheit is

also explicit in recognizing that the only function of the clause in the sovereign context is
to restrain the sovereign borrower from passing laws aimed at distorting the position of
equality given to the beneficiaries of the clause. He explains his argument as follows:
If a sovereign borrower intends as a practical matter to

discriminate among its creditors in terms of payments, the
83
Id.
The same premise is also put forward by Wood, who mentions that in the case of a sovereign state, the
pari passu clause bears a different construction. A government cannot be liquidated (at least not in that
sense) nor of course are there procedures for the ranking of governmental debt on sovereign bankruptcy
equivalent to those pertaining in private bankruptcy. See Philip Wood, supra note 68, at 6-23.
85
84
-32-
pari passu undertaking will at least prevent the sovereign

from attempting to legitimize the discrimination by
enacting laws or decrees which purport to bestow a senior
status on certain indebtedness or give a legal preference to
certain creditors over others86.
Apparently, the great concern here is related to the possibility of subordination. In

general, a regular corporate borrower cannot legally subordinate a lender without its
express consent87. Accordingly, Gooch & Klein argue that the pari passu clause88 in
effect states that there are no legal provisions which would cause the loans to be
subordinated to other indebtedness of the borrower89. However, in the case of a
sovereign, it could simply alter the law to subordinate the disfavored lender90. That is a
matter that is under the sovereigns control. In this regard, Buchheit mentions that
sovereign borrowers, because they have it within their power to enact laws affecting the
legal ranking of creditors, are thought to be appropriate objects of a pari passu
covenant91.
Therefore, it is held that lenders normally request the inclusion of this provision in
their contracts to ensure that their credits will not automatically be subordinated to other
existing senior indebtedness of the borrower92 and, specially in the case of sovereigns, to
86

See Gulati & Klee, supra note 4, at 640. See also Lee C. Buchheit, supra note 76, at 11.
88
The idea put forward by these commentators is referred to the pari passu clause included in a contract as
a representation and warranty, not as a covenant. That explains the using of present tense by the authors.
89
Anthony C. Gooch & Linda B. Klein, Annotated Sample Loan Agreement, in International Borrowing:
Negotiating and Structuring International Debt Transactions, Second Edition, Daniel D. Bradlow, Editor
(1986), at 332.
90
Id.
91
92
Lee C. Buchheit & Ralph Reisner, Inter-Creditor Issues in Debt Restructuring, in International
Borrowing: Negotiating and Structuring International Debt Transactions, Third Edition, Daniel D.
Bradlow, Editor (1994), at 438.
87
-33-
bar the borrower from attempting to create a class of senior indebtedness in preference
to that outstanding under the loan agreement in which the clause appears93. Blocking
contractually the ability of sovereign borrower to affect the status of its lenders seems to
be the main (if not the only) function of the pari passu clause in the sovereign context.
This is clearly suggested by Walker & Buchheit when holding that the pari passu clause
will restrict the [sovereign] borrower from subordinating in a formal way the debt being
incurred (or restructured) pursuant to the agreement containing this clause in favor of
some other external obligation94.
Subordination, however, can occur in a legal/formal sense e.g. when a sovereign

enacts a statute altering the priority status of its creditors, or it can also occur in practice,
namely when a sovereign just treats some creditors more favorably than others, in what
could be referred to as de facto subordination. This type of subordination, nonetheless, is
allegedly not restricted by the pari passu clause in the sovereign context. This is the
argument put forward by Buchheit & Reisner, who expressly state that [t]he borrower
does not violate this clause by electing as a matter of practice to pay certain indebtedness
in preference to the obligations outstanding under the agreement in which this clause
appears95. Exploring this idea much further, Buchheit explains that:
The existence of a conventional pari passu undertaking in

a loan agreement will have no effect on the sovereign
93
Id.
Mark Walker & Lee C. Buchheit, Legal Issues in the Restructuring of Commercial Bank Loans to
Sovereign Borrowers, in International Borrowing: Negotiating and Structuring International Debt
Transactions, Second Edition, Daniel D. Bradlow, Editor (1986), at 464. See also Esin Taboglu, supra
note 59, at 42.
95
Buchheit & Reisner, supra note 92, at 438.
94
-34-
borrowers legal ability to pay one creditor even if it is then

in default on its payment obligations to other creditors, to
prepay one lender or group of lenders ahead of some others
or to pledge assets to secure the borrowers obligations
under one loan without giving equal security in respect of
its other indebtedness. If a lender wants these protections, it
must search for them in other clauses of the loan agreement
or restructuring agreement96.
In sum, what can be concluded so far is that there are several and divergent
interpretations of the pari passu provision, apart from the one presented by Lowenfeld. In
fact, his broad suggestion that the pari passu provision implies that all payments must be
made on a pro rata basis without considering the context in which the clause is applied,
does not find much support amongst commentators. Most of the academic writings
consulted analyze the issue in question from a double perspective, that is, differentiating
expressly between the two dissimilar contexts where the clause plays its role, namely the
corporate and the sovereign contexts97. Certainly, there is a uniform position with regard
to the meaning of the clause in the corporate context: It does not mean what Lowenfeld
suggested. However, when referring to the sovereign context, commentators opinions
are divided. The two extremes of the spectrum can clearly be observed. On the one hand,
Lowenfelds theory, on the other, Buchheits argument. The question then becomes: How
to decide which is the right one? This is exactly the question that the next part of this
paper will address and try to answer.
96

See Guillermo Soliven, Some Issues in the Negotiation of Commercial Foreign Exchange Loans in
Developing Countries, in Issues in Negotiating International Loan Agreements with Transnational Banks,
United Nations Centre on Transnational Corporations, New York 1983, at 17. (It has been expressly
recognized that this is one of the areas where there are marked differences in the clauses applicable to
97
-35-
2.
Elements to be taken into account when deciding for the right

interpretation of the pari passu clause
As can be concluded from what has been explained above, academics have not
arrived at a uniform position with regard to the correct interpretation of the pari passu
rule. Academic opinions based on abstract rationales, however, are not always in line
with what normally happens in real life. Accordingly, probably the best way of
determining which of the interpretations presented is the more coherent is to contrast
them against the market understanding of the clause under consideration. Understanding
what would be the reaction of lenders, borrowers, and the market, when facing the pari
passu provision under its different interpretations, is of the utmost importance for the
goal of this paper. After going through the analysis suggested, Gulati & Klee conclude
that if Lowenfelds opinion were the correct one, [d]ebtors, and especially sovereign
debtors, would be crazy to agree to such a term with all of their creditors98. These
authors suggest that if debtors agreed to give creditors pari passu rights under
Lowenfelds terms, this would then result in a lower interest coupon for the creditors
who receive it, to be granted only after hard negotiations, and to be given to only a few
creditors99. In order to test this conclusion, the next few paragraphs will focus on
determining the general market understanding of the pari passu clause.
2.1
Necessity to pay preferred creditors first
private and public sector borrowers, arising as a result of the differences in the debt obligations of these two
types of entities).
98
99
Id.
-36-
It is expressly mentioned in Lowenfelds Declaration that a clause such as Section

11(c), the pari passu clause, is standard in virtually all loan or debt restructuring
agreements and sovereign guaranties 100. It is therefore reasonable to assume that most --if
not all-- of the external indebtedness of sovereign creditors is subject to the same
provision: ranks, and will rank, pari passu. Thus, under Lowenfelds interpretation of
the clause, there cannot be preferred creditors and it would be impossible for a sovereign
to pay one creditor before another. This author expressly states that [w]hen the borrower
(or guarantor) is a sovereign state, there are no super-priority unsecured creditors and the
pari passu clause is a general non-discrimination clause.
This assumption clearly contrasts with what can be observed in practice, where
International Financial Institutions have effectively assumed a status of preferred
creditors. About this particular issue, Ibrahim F.I. Shihata states that [n]othwithstanding
the pari passu clause, borrowing governments have, in practice, generally accorded
preferred creditors status to international financial institutions such as the World Bank
and the IMF101. The author concludes mentioning that [t]he preferred creditor status is
a practical arrangement accepted by borrowers and other lenders102. Gulati & Klee
explain the gravamen of such a conclusion in the following terms:
A sovereign that is short of cash will not wish to make

payments pro rata, thereby defaulting on all its debts and
bringing upon itself the ire of every creditor. Instead, a
100

See Ibrahim F.I. Shihata, supra note 58, at 303.
102
Id.
101
-37-
sovereign will want to be able to pay the important

creditors first so that they continue to provide support103.
In addition, there are other categories of creditors that also assume a de facto
status as preferred creditors due to their strategic significance for the welfare of the
sovereign borrower. Thus, any attempt to restructure or default on the payment of these
types of credit will trigger adverse consequences for the debtor country. Amongst this
class of preferred creditors can be found, for instance, those derived from short-term
trade and also suppliers credits. Default in the payment on such type of credits will
inevitably jeopardize the sovereigns ability to participate in international trade104.
Given the recognized interest of sovereign borrowers --and even other lenders-- in
maintaining such a de facto preferred status of International Financial Institutions and
other type of creditors, it is difficult to understand why these parties would incorporate a
pari passu clause in their contracts if this bore the meaning attributed by Lowenfeld.
2.2
The role played by other clauses normally included in international loan

contracts
It is widely recognized by most commentators when referring to the typical

clauses included in international loan contracts, that the pari passu clause is normally
accompanied by a negative pledge clause. Ian F.G. Baxter remarks that [t]he purpose
103

See Lee C. Buchheit, Of Creditors, Preferred and Otherwise, 10 International Law Review, No. 6 (June
1991), at 12.
104
-38-
of the negative pledge is to prohibit the borrower from granting a security interest in its
assets or funds in favor of another creditor, or other creditors, which would give a priority
over the lender or lenders105. The author explains that the main functions performed by
the negative pledge clause are 1) to prevent the allocation of substantial assets of the
borrower to one or more secured creditors; 2) to produce equality among creditors of the
same class ; and 3) to discourage excessive borrowing, made possible by the grant of
security over assets106.
The rational function of these two clauses, which are normally found together, is
to complement each other within the text of the contract. This is recognized by Walker &
Bucheit, who mention that the negative pledge clause is intended to complement the
protection sought by the lender in the pari passu undertaking by ensuring that subsequent
creditors of the borrower will share the lenders status as a general creditor107.
Under the broad interpretation presented by Lowenfeld, the pari passu clause
could be understood as limiting even any eventual intent of the sovereign borrower to
benefit any of its external creditors by granting them security over any of its assets. Given
the fact that the creditor benefited with the security could eventually foreclose such
assets, this action would be considered as a breach of the pro rata rule suggested by
Lowenfeld. Therefore, under the interpretation argued by the latter, the pari passu clause
would end up performing the function normally attributed to the negative pledge
clause. As mentioned above, both clauses are supposed to complement each other and
105
106
Ian F.C. Baxter, International Banking and Finance, Carswell (1989), at 73-74.
Id.
-39-
not to overlap in their functions. Consequently, this outcome seems to suggest that
Lowenfelds interpretation is not completely accurate.
A very interesting explanation of the historical co-relation between the pari passu
clause and the negative pledge provision is that given by Gulati & Klee. The authors
suggest that one of the possible explanations of the position assumed by Tudor John -upon which Lowenfelds opinion is based-- is that at the time such argumentation was
elaborated (probably at the beginning of the 20th century) there were no sovereign
security interest and, hence, no negative pledge clauses108. They conclude speculating
that [t]he pari passu clause, therefore, probably served as something as a substitute
because the primary risk to guard against was not collateralization but subordination109.
Along with the negative pledge clause, international loan agreements also include
other type of clauses with a very straightforward meaning, whose purpose and function
can be deemed as overlapping with the significance attributed by Lowenfeld to the pari
passu clause. The two most prominent clauses in this group are the mandatory
prepayment clause and the sharing clause110.
The sharing clause, also known as pro rata sharing clause, has been defined
in the international banking context as a syndicate equality clause designed to share
individual receipts by one bank but not the others (e.g. set-offs, proceeds of litigation,
107
Walker & Buchheit, supra note 94, at 464.

Gulati & Klee, supra note 4, at 640, footnote 29.
109
Id.
110
See Id., at 646. See also Lee C. Buchheit, supra note 76, at 12.
108
-40-
direct payment by the borrower, etc.)111. In the words of Wood, it provides that if any
bank receives a greater proportion of its share, it must pay the excess to the agent who
redistributes to the banks pro rata112. Put in simple terms, it is a clause whereby
whatever one lender receives has to be shared ratably with the others113. The meaning
of this clause has been expressly recognized by US courts. In a recent case, a creditor
sued the Republic of Congo and was able to find a US court imposing an effective
sharing clause on the payments made by the sovereign to other creditors114. There is,
therefore, a general consensus about the basic concept involved in this clause: the sharing
of individual receipts on a pro rata basis. But, what is the purpose of this clause and its
relation to the pari passu clause? First, it is argued that this clause helps to fill the
vacuum caused by the absence of an enforced pari passu bankruptcy code115 by
discouraging the piecemeal seizure of the borrowers assets. Second, the clause aims to
avoid the borrowers making of preferential discriminatory payments to favored
creditors, so that the clause merely carries into effect the doctrine of recapturing
preferences universally adopted by municipal bankruptcy law116. Surprisingly, according
to Lowenfeld, these are allegedly the same objectives of the pari passu clause.
111
See Von Holger Langer, International Finance Law, in Syndicated Loan Agreements I The
Syndication Process, available at http://www.ganz-recht.de/stlehre/Ausland/finl1.htm (visited on April 8,
2002)
112
Philip R. Wood, supra note 69, at 166.
113
Gulati & Klee, supra note 4, at 646. See also Lee C. Buchheit, Changing Bond Documentation: The
Sharing Clause, in International Financial Law Review (July 1998), at 17. (Sharing clauses are provisions
that force a creditor receiving a disproportionate payment under a multi-creditor debt instrument like a
syndicated loan (including a payment following litigation) to share that payment on a ratable basis with
other creditors in that facility. These provisions are standard in syndicated commercial bank loans but are
not common in publicly-issued bonds).
114
See Nouriel Roubini, Bail-ins, Bailouts, Burden Sharing and Private Sector Involvement in Crisis
Resolution: The G-7 Framework and Some Suggestions on the Open Unresolved Issues, Sterns School of
Business (NY 2001), available at http://www.stern.nyu.edu/~nroubini/asia/bailins.doc (visited on April 8,
2002)
115
Philip R. Wood, supra note 69, at 166.
116
Id.
-41-
On the other hand, the mandatory prepayment clause has been defined as a
provision whereby borrowers can be barred from making non-ratable prepayments to
other creditors 117. This provision is basically aimed at assuring lenders that they will be
paid pro rata on their credits. Joseph Norton mentions that the clause in question requires
that, whenever a creditor is prepaid, the borrower must prepay the rest of creditors on a
pro rata basis118. The content and effects of the clause are explained in the following
terms:
This clause is designed to provide remedies to banks and

financial institutions which have restructured their debt if
the obligor concerned services comparable indebtedness in
a manner which is more preferential to that of the
restructuring or new money agreement. For example, the
clause would require that if the obligor pays 10% of the
debt to a free rider, then the creditors who have restructured
are entitled to 10% of the debt owing to them (at most), or
the actual amount paid to the free rider (at least), depending
on how the clause is drafted.119
Under the same reasoning applied when comparing the role of the negative
pledge clause and Lowenfelds construction of the pari passu provision, it is clear that
the latter interpretation evidently overlaps with the role widely recognized for the
aforementioned clauses, and hence, renders them meaningless. If Lowenfelds assertion
were correct, would there be any reason to include any of the referred two clauses in a
117
See Gulati & Klee, supra note 4, at 646. See also Lee C. Buchheit, supra note 76, at 12.
See Joseph J. Norton, International Syndicated Lending: The Legal Context for Economic Development
in Latin America, in NAFTA: Law and Business Review of the Americas (Summer 1996).
119
See UNITAR Training and Capacity Building Programmes in the Legal Aspects of Debt, Financial
Management
ad
Negotiation;
Online
Resource
Center,
Glossaries.
Available
at
118
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contract together with a pari passu provision? Apparently, there would not. It could be
considered as redundant or as a typical act of over-lawyering. Such clauses are,
nonetheless, likely to be found in practice along with pari passu provisions in
international loan contracts. Again, international financial practice seems to disagree with
Lowenfelds position120.
2.3
Variations on the conventional terms of the pari passu clause
The text of the pari passu clause included in the 1983 Letter Agreements
guaranteed by Peru is generally acknowledged as the standard text of the clause. It
represents what can be deemed as the pari passu provision in its basic form: rank and
will rank at least pari passu in priority of payment. However, the international financial
arena has witnessed different variations of the basic terms of the clause.
Buchheit121 makes reference to several different types of variation introduced by

practitioners. Thus, for instance, it is possible to come across pari passu provisions
bearing the following phrase: will rank pari passu in priority of payment and in all other
respects. Likewise, though less frequently, it is possible to find the text: will rank pari
http://www.unitar.org/dfm/Resource_Center/TrainingPackage/TP10/GlossaryP.htm (visited on March 17,

2002)
120
See Gulati & Klee, supra note 4, at 646. (Besides the clauses already referred to above, there are two
others, the turnover clause [creditors who receive preferential payments have to turn it over to the others]
as well as the acceleration clause [creditors who hold debts in default gets to ask for all of the debt to be
paid immediately], that can be subject to the same analysis).
121
See Lee C. Buchheit, supra note 76, at 12.
-43-
passu in priority of payment with all other External Indebtedness of the Borrower and
will be paid as such122.
It is claimed that the additional language incorporated in the text of the basic pari
passu clause reinforces the argument against the interpretation presented by Lowenfeld.
The author quoted above suggests that the variation introduced shows that practitioners
recognize that the clause, under its conventional terms, throws only a blubbery arm in
the path of a sovereign borrower intent on mischief123. Gulati & Klee agree. They
mention that if the standard pari passu clause means what [Lowenfeld] says it does, then
lawyers have been wasting their time in specifically contracting for this additional
language124.
This argument does not seem to be, however, irrefutable. By the same token, it
could easily be argued that the drafting variations introduced to the conventional terms of
the pari passu clause, were made only for the sake of clarity and preciseness.
2.4
International Public Policy Issue: The holdout creditor problem
122
See Id. (Buchheit expressly consigns the text of a provision that he refers to as the mother of all pari
passu clauses: Pari Passu status. The obligation of the Borrower to pay the principal of and interest on the
Loans shall at all times rank pari senior to, or pari passu with all other indebtedness, direct or contingent,
of the Borrower for borrowed money, payable, or which at the option of Borrower or a creditor may
become payable, in Dollars or any currency other than [local currency] without any preference in favor of
any such other indebtedness by reason of priority of the date of issue, priority by reason of form, security
thereof by way of pledge, assignment, mortgage, security interest or any other encumbrance on gold or
holdings of foreign currency deposits, agreements to maintain deposits, agreements to turn over specific
moneys or in any other way, direct or indirect, express or implied, or by way of any other agreement, or
other terms or provisions).
123
Id.
-44-
Under the current international financial scenario, there is no longer possible to

restructure the external debts of sovereign countries using the same strategy applied at the
beginning of the eighties. By then, when any of the sovereign borrowers was going
through a liquidity crisis and, therefore, was unable to meet its international financial
obligations, creditors (mostly commercial banks125), represented by a Bank Advisory
Committee, would promptly negotiate with the sovereign the restructuring of the debt.
Anne Kruger explains such a past tendency arguing that banks had good reasons to be
cooperative: similar institutional interests; a desire to secure future business from the
debtor; a reluctance to offend regulators; and a legal obligation to share any proceeds of
litigation with their fellow creditors126.
The basic structure of sovereign debt has changed drastically since then. With the
implementation of the Brady Plan at the beginning of the nineties, sovereign debt is now
usually not represented by international loan agreements but by freely negotiable bearer
bonds instead. Accordingly, the holding of sovereign debt instruments is no longer a
quasi-exclusive right of commercial banks. In recent years, private creditors have become
increasingly numerous, so that they are now hardly identifiable 127. This fact has proven to
124

See Anne Krueger, A New Approach to Sovereign Debt Restructuring, transcript of a speech given at the
Indian Council for Research on International Economic Relations (December 20, 2001). Available at
http://www.imf.org/external/np/speeches/2001/122001.htm (visited on April 8, 2002). (According to a
report prepared by the IMF, in the early eighties banks held around 85% of outstanding emerging market
sovereign debt).
126
Id.
127
See IMF Research Paper, The Evolution of Emerging Market Capital Flows: Why We Need to Look
Again at Sovereign Debt Restructuring, available at http://www.investavenue.com/article.html?ID=3888
(visited on April 8, 2002). (It is mentioned that we now live in a very different world. The proportion of
the emerging market debt stock held in bonds has quadrupled. And bondholders are more numerous,
anonymous, and difficult to coordinate than banks. Most do not seek long-term relationships with the
debtor or fear the arm-twisting of regulators. Bondholders also have greater incentives to sue delinquent
creditors, because unlike banks they do not have to share the proceeds of litigation. The situation is further
125
-45-
be a serious obstacle to reach negotiated restructurings between the sovereign borrower

and its creditors. Hence, when the sovereign is facing financial difficulties to service its
external debt, and the terms of its bonds require unanimous consent of the bondholders
for amending the payment terms, the most efficient alternative available to restructure its
debt is through an exchange offer.
As explained by Buchheit, the obvious problem with using exchange offers as

the legal technique for carrying out sovereign bond restructurings is that an exchange
offer does not bind non-participating holders128. The author continues, explaining that
the holders declining the offer are left with their old bonds and will continue to enjoy
their full legal rights and remedies under those instruments129. This issue has been
judicially decided by the South District Court of New York when resolving the Elliot
Case130. Holdout creditors constitute, therefore, an on-going litigation threat to the
sovereign borrower. However, such a threat used to be relatively under control before the
Elliot Case and the Brussels Decision, when the ability of holdout creditors to obtain
payment from sovereigns was restricted by the U.S. Foreign Sovereign Immunities Act.
Holdout creditors have normally caused disruptions in the orderly restructuring of

sovereign debts. Now that they feel their position has received the indirect backing of the
Brussels Decision, a higher number of creditors holding out might be expected, and
complicated by the growing variety of debt instruments and derivatives in play. All this increases the
"collective action problem" of getting agreement among creditors on the terms of a restructuring - even if
almost all of them would benefit).
128
Lee C. Buchheit, Sovereign Debtors and Their Bondholders, in UNITAR Training Programmes on
Foreign Economic Relations, Document No. 1, at 8. The document can be found at
http://www.unitar.org/dfm/Resource_Center/Experts/Buchheit/Buchheit.htm (visited on March 17, 2002)
129
Id.
-46-
consequently more disruptions in the restructuring process. With this extra leverage
purportedly received, holdout creditors will probably be stronger at the negotiation table
and will most likely obtain higher benefits at the cost of the sovereign and the rest of
creditors. Restructuring is a process intended to benefit the interest of both borrower and
creditors, and indirectly the market in general. A holdout creditor causing disruption in
the orderly process will impose costs on both sides131. Given that the interests of the
majority of creditors is directly affected by the position adopted by only few holdouts, it
seems to be unlikely that those same creditors had agreed to participate in syndicated loan
contracts which incorporate within its terms a pari passu clause, if they would have been
aware that the meaning of the referred clause was the one suggested by Lowenfeld and
confirmed by the Brussels Decision.
3.
Rules for the Interpretation of International Loan Contracts
It is clear that there are several different interpretations of the meaning and effects
of the pari passu clause. A literal approach seems to favor Lowenfelds position, whereas
a market understanding approach seems to favor Buchheits stance. Besides, there have
been postulated several elements that can help us understand which is, or should be, the
real significance of the clause in question. Taking into account all that has been discussed
and concluded so far, this part of the paper is intended to explore the different formal
rules of interpretation and construction of contracts which would eventually result
applicable for determining the meaning that should finally prevail. Given that most
130
131
Elliott Associates, L.P. v. The Republic of Peru, 12 F. Supp. 328 at 344 (S.D.N.Y. 1998)
-47-
international loan agreements and sovereign bond contracts are subject to either New
York law or English law, the following analysis only focuses on the rules relevant to such
jurisdictions.
3.1
New York Rules
With regard to the rules of contractual interpretation applicable under New York law,
there are quite straightforward principles which can be employed to further the aim of
this paper. First, there is uniform recognition of the importance of the general public
awareness or market customs with regard to the debated term or clause. Thus, Margaret
Kniffin explains that [t]rade or local usage are among the varieties of extrinsic evidence
most readily admitted by courts in order to discern the meaning of contract terms132.
Trade usage is defined by 1-205 of the Uniform Commercial Code as any practice or
method of dealing having such regularity of observance in a place, vocation or trade as to
justify an expectation that it will be observed with respect to the transaction in
question133. Additionally, 202(3)(a) of the Restatement (Second) of Contracts expressly
provides that unless a different intention is manifested () where language has a
general prevailing meaning, it is interpreted in accordance with that meaning. After
analyzing the arguments put forward for and against Lowenfelds interpretation, it seems
to be that the idea of pari passu meaning something different than pro rata could qualify
132
See Margaret N. Kniffin, Corbin on Contracts, Revised Edition, Volume 5, Interpretation, 1998, at 266.
See Id. (Commenting that section, the author adds The language used is to be interpreted as meaning
what it may fairly be expected to mean to parties involved in the particular commercial transaction in a
given locality or in a given vocation or trade).
133
-48-
as a practice of relevant observance or being considered a general prevailing

meaning. It can be argued that the main actors in the international financial arena by the
time the Letter Agreements were entered into, namely sovereigns, multilaterals and
banks, certainly believed that the pari passu clause they were incorporating into their
respective loan agreements did not mean what Elliott suggested later. Immanent within
this last argument is the fact that there have been several sovereign debt restructuring
processes since the Letter Agreements were entered into --all related to agreements
incorporating a pari passu clause-- where payments have been made to de facto preferred
creditors, and there have never been a lender formally complaining134 about the
infringement of an alleged pro rata right derived from the pari passu clause. The only
logical explanation to such an irrefutable fact is that Lowenfelds position did not
represent the general market understanding of the clause under analysis. Hence, the
practice of relevant observance in financial markets was to give the pari passu clause a
meaning different from that of pro rata. Having said that, it must be stressed that both the
Uniform Commercial Code and the Restatement (Second) of Contracts indicate that the
plain meaning rule (upon which Lowenfelds argument is mainly based) is inapplicable
to evidence of trade usage.
The importance of the market understanding in determining the significance of

contractual terms has been judicially recognized with regard to loans incorporated in
134
During the research done for the purpose of this paper, we were unable to find any information or
reference about any American case in which the meaning of a pari passu clause was decided.
-49-
bond contracts135. Gulati & Klee explain the rationale behind such a principle arguing
that if everyone in the market understands and knows what the standard terms mean and
knows that the courts will follow these standard understandings, that provides certainty,
which in turn promotes efficiency136. Based on this idea, courts give preference to
market certainty when interpreting boilerplate language. Thus, in the Sharon Steel case,
it was decided that uniformity in interpretation is important to the efficiency of capital
markets137. Evidently, market certainty and uniformity can only be accomplished by
favoring the market understanding of such boilerplate provisions. Following this
principle, in Southeast Banking Corp., the New York Court of Appeals issued a
unanimous decision adopting a Rule of Explicitness identical to the federal rule, based
on the fact that such a rule had been already adopted by the capital markets.
Another important rule for the interpretation of contractual terms requires that
the entire contract be considered and that any ambiguities be resolved to fit with the
contract as a whole and to make every part of the contract meaningful138. This principle
was clearly stated in Laba v. Carey, where it was held that a court should not adopt an
interpretation which will operate to leave a provision of a contract without force and
effect139. Under the same premise, the U.S. Supreme Court decided in Mastrobuono v.
Shearson Lehman Hutton, Inc., that it is a cardinal principle of contract construction that
document should be read to give effect to all its provision and to render them consistent
135
See Chemical Bank v. First Trust of New York, N.A. (In re Southeast Banking Corp.) 710 N.E. 2d 1083,
1086 (N.Y. 1999), where the New York Court of Appeals mentions the importance of giving deference to
market understanding when interpreting commercial matters.
136
137
See Sharon Steel Corp. v. Chase Manhattan Bank, N.A., 691 F.2d 1039, 1048 (2d Cir. 1982). See also
Broad v. Rockwell Intl Corp., 642 F.2d 929,943 (5th Cir. 1981).
138
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with each other140. As explained above, the interpretation suggested by Lowenfeld has
serious drawbacks when it is contrasted against some other boilerplate provisions
typically included in international loan contracts and bond contracts, such as the negative
pledge covenant, the sharing clause or the mandatory prepayment provision.
Accordingly, courts must reject any interpretation of the pari passu provision which
renders the referred other provisions meaningless.
Finally, it has been held that courts must take the public interest and public policy
into account when deciding amongst different possible meanings of contractual terms. In
Mastrobuono v. Shearson Lehman Hutton, Inc., the U.S. Supreme Court recognized that
when a contract term may be interpreted in at least two reasonable ways, the meaning that
furthers public policy should be preferred141. Based on the same principle, the 207 of the
Restatement (Second) of Contracts expressly states that [i]n choosing among the
reasonable meanings of a promise or an agreement or a term thereof, a meaning that
serves the public interest is generally preferred. Therefore, given that Lowenfelds
interpretation favors the private interest of individual holdout creditors against the
general interest of the rest of participants in the market, it seems that courts would prefer
the alternative interpretation of the clause in question.
3.2
English Rules
139
See Laba v. Carey, 277 N.E.2d 641, 644 (N.Y. 1971)

See Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 115 S.Ct. 1212, 131 L.Ed.2d 76, 63
USLW 4195, Blue Sky L. Rep. P U.S.I11. (Mar 06, 1995).
141
See Id.
140
-51-
The principles followed by English law for the interpretation of contracts are
basically the same as the ones explained above142. The core idea behind the English
principles of construction is to try to identify the meaning which the document would
convey to a reasonable person having all the background knowledge which would
reasonably have been available to the parties in the situation in which they were at the
time of the contract143. Thus, the particular context and background of the parties
involved plays a very significant role. Kim Lewison144 explains that [w]here a word has
a particular meaning in a particular locality or among a particular class of persons,
evidence is admissible to show that the parties intended to give the word that meaning,
and upon proof of such intention, the word should be construed accordingly.
Besides, when dealing with mercantile contracts in particular, such documents

must be construed in a business fashion145 and there must be ascribed to the words a
meaning that would make good commercial sense146. Accordingly, trade custom or
usage will be considered by English courts when interpreting the meaning of words or
contractual terms, provided it is notorious, certain and reasonable147. In other words, mere
trade practice would be insufficient148.
142
See H. G. Beale, Chitty on Contracts, Volume I, General Principles, Twenty Eighth Edition, Sweet &
Maxwell (London 1999). See also Kim Lewison, The Interpretation of Contracts, Sweet & Maxwell
(London 1997).
143
See Mannai Investment Co Ltd. V. Eagle Star Life Assurance Co. Ltd [1997] A.C. 749, 767, 775, 782;
See also Investors Compensation Scheme Ltd. v. West Bromwich Building Society [1998] 1 W.L.R. 896,
912-913.
144
See Kim Lewison, supra note 142, at 106. (The author bases her remarks in the following dicta: Shore v.
Wilson (1842) 47 B.L.R. 55, C.A.; Smith v. Wilson (1832) 3 B. & Ad. 732; Produce Brokers Co. Ltd v.
Olympia Oil and Cake Co. Ltd. [1917] 1 K.B. 320 at 330; Myers v. Sarl (1860) 3 E. & E. 306).
145
See Southland Frozen Meat and Produce Export Co. Ltd. v. Nelson Brothers Ltd. [1898] A.C. 442, 444.
146
See Miramar Maritime Corpn. V. Holborn Oil Trading Ltd. [1984] A.C. 676, 682.
-52-
Finally, it has also been held that the reasonableness of the result of any
particular construction is a relevant consideration in choosing between rival
constructions149. Contracts must be read and interpreted as a whole, and their clauses
must be construed in a way so as to avoid absurdity or inconsistency with the rest of the
instrument. This principle was clearly stated by Lord Watson150 in the following terms:
I find nothing in this case to oust the application of the

well known rule that a deed ought to be read as a whole, in
order to ascertain the true meaning of its several clauses;
and that the words of each clause should be so interpreted
as to bring them into harmony with the other provisions of
the deed
Based on the same rationale outlined above when explaining the New York rules
applicable to the interpretation of contracts, it is likely that the English rules for
contractual construction will also favor the interpretation put forward by Buchheit as an
alternative over Lowenfelds position. As explained above, the latter does not seem to
follow what can be regarded as the market understanding of the clause in question; it may
render meaningless other clauses of the contract, and does not produce an outcome which
can be uniformly qualified as reasonable in the international financial context.
IV
147
See Devonald v. Rosser & Sons [1906] 2 K.B. 728, 743.

See Cunliffe-Owen v. Teather and Greenwood [1967] 1 W.L.R. 1421, 1438.
149
See Kim Lewison, supra note 142, at 106. See also Tillmanns & Co. v. S.S. Knutsford Ltd [1908] 2
K.B. 385; Schuler (L.) A.G. v. Wickman Machine Tool Sales Ltd. [1974] A.C. 235.
150
See Chamber Colliery Ltd v. Twyerould (1893) [1915] 1 Ch. 268 (Note).
148
-53-
FORMAL ASPECTS OF THE BRUSSELS DECISION
The Brussels Decision, which finally turned Elliotts pea shooter into a
thermonuclear weapon and forced Peru to settle the claim, was issued by the 8th
Chamber of Court of Appeals of Brussels, revoking the decision originally adopted by the
President of the Brussels Commercial Court. It must be recalled that the initial decision
reached by the latter had denied Elliott ex parte motion to obtain an injunction against
Euroclear. That was, in simple terms and from a formal perspective, what occurred in the
procedure initiated by Elliott in Brussels. And this is also the formal scenario in which
the substantive conclusions arrived at by the Brussels Court are framed, including the one
which equalizes the meaning of the pari passu clause to that of pro rata. Having said all
that, this last part of the paper is focused on analyzing whether such particular formal
characteristics may affect the validity of the conclusion presented by the Brussels Court.
More precisely, the following paragraphs examine if the referred decision represents a
firm and definite conclusion of law.
The first issue to be taken into account is the fact that the Brussels decision came
up in response to an ex parte petition put forward by Elliott. The use of this type of action
is very restricted under Belgium Law and can only be used in cases explicitly provided
for by statute. Henk Snijders explains that in the ex parte petition procedure any
opposing party will not be notified in order to be heard by the court before a decision is
-54-
made151. That is, there will be no hearing at all and a decision will be made solely on the
basis of the plaintiffs written application152.
The second aspect which has to be considered when assessing the binding force of
the Brussels Decision is the fact that, according to Belgium law, any decision made
pursuant to an ex parte application is given in camera153. This element happens to be
quite interesting for the purpose of this paper given that [t]he results of proceedings in
camera are not considered decisions on the merits154. It is evident, then, that any
conclusion arrived at by any Belgium court when deciding upon ex parte petitions is not
related to the legal validity of any right alleged by the petitioner, but only to the formal
admissibility of the petition. Exploring further this particular characteristic, Nicholas
Rose mentions expressly that:
The provisional character of the decision made in

[camera] means that compliance with the decision, even
without reservations, cannot itself prejudice the merits of
the case of the party who so complied. () The judge who
hears the merits of the case is not bound by the decision
made in chambers, although he must pay attention to its
existence. He remains completely free to assess the case as
he deems appropriate155.
Additionally, the injunction obtained by Elliott in Brussels was granted on the

basis of article 584 of the Belgium Judicial Code. According to such a regulation, there
151
Henk J. Snijders, Access to Civil Procedure Abroad, Sweet & Maxwell (London 1996), at 219.
See Nicholas Rose, Pre-Emptive Remedies in Europe, Longman (London 1992), at 47.
153
See Id., at 57.
154
Elio Fazzalari, Civil Justice in the Countries of the European Union, Trenton Publishing (London 1998),
at 50.
152
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are two major conditions which have to be complied with for obtaining an injunction,
namely: (a) the issue must be recognized as urgent by the court; and (b) the solution
sought must be provisional and may not prejudice the merits of the case156. In addition,
when the injunction is requested through an ex parte petition, it is only authorized in
cases of absolute necessity157, the assessment of which depends entirely on factual
circumstances158. Thus, it is clear that the article upon which Elliotts injunction was
granted does not request the court to decide on the validity or not of the rights alleged by
the petitioner before ruling on the injunction. Given this characteristic, it is
understandable that the article expressly restrains the court from granting any injunction
which might eventually jeopardize the merits of the case. It can be argued, therefore, that
the decision adopted by the Brussels Court was mainly based on the urgency of the
situation presented by Elliott, and not on a substantive analysis of the rights alleged by
Elliott. This feature of injunctions under article 584 is explained by Nicholas Rose in the
following terms:
It was traditionally held that article 584 of the Judicial

Code prohibited the Judge in Chambers from considering
the merits of the case and that this prohibition was absolute
and was part of the Belgian Public order (Cass 15.2.1972,
Pas 1972, I, 469). () The Judge in Chambers is still not
entitled to make decisions on the merits of the case, even
provisionally. However, it now seems generally accepted
that he may base his decision on the right of a party or on a
factual situation, provided that right or situation is obvious
155
Nicholas Rose, supra note 152, at 49.

See Id., at 46.
157
See Id., at 47.
158
See Id. (It is usually accepted that there is absolute necessity when: (a) the urgency is exceptional; and
(b) bearing in mind the measure requested, any other type of hearing would obviously render any order of
the court ineffective if the defendant had any warning of the application).
156
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or could not seriously be disputed. Sufficient likeliness of a

right authorizes the court to order an interim measure159.
Thus, the main conclusion which can be extracted from what has been explained
above is that the Brussels Decision, legally speaking, is not a decision on the merits, that
is, the court did not technically decide (since it was not authorized to do so) whether the
pari passu clause implies a pro rata right of the petitioner. As has been mentioned,
sufficient likeliness of a right is enough for the courts granting an injunction under
article 584 of the Judicial Code. Evidently, sufficient likeliness can not be deemed
binding on future decisions. This characteristic is typical of Civil Law systems and has
been expressly recognized at European Union level, where the judge hearing
applications for interim relief may not prejudge the decision in the proceeding on the
substance160. Consequently, it is claimed that any assessment will be confined to
whether the arguments put forward by the applicant in the main proceedings are, prima
facie, basically sound or are certainly doomed to fail161.
In sum, from a formal perspective, it is clear that the Brussels Decision does not
represent a firm and definite conclusion of law. Any thoughts, arguments and ideas
expressed in the text of the decision are not binding to other Belgium courts for being so
expressly mandated by law, which is easily understandable because they have been
reached: (i) without hearing the arguments of the other party affected; (ii) without
159
See Id., at 48.

Koen Lenarerts & Dirk Arts, Procedural Law of the European Union, Sweet & Maxwell (London
1999), at 299.
161
See Id.
160
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considering all the facts involved; (iii) under time constraints due to the urgency of the
petitioner; and (iv) through a very superficial analysis aimed at determining sufficient
likeliness or a prima facie case only. Given that this decision will not be used as a
precedent for mandatory observance in Belgium, it should not be used as such by any
other foreign court. Therefore, the risk suggested by Mulati & Klee of having some later
court looking at to the Brussels Decision and holding it as the standard interpretation162
seems to be very remote.
ADDITIONAL SUBSTANTIVE ISSUES
Apart from the formal aspects referred to above, there are two other substantial
factors which have not been mentioned yet, but whose impact would necessarily have to
be analyzed by any court examining the validity of the reasoning presented in the
Brussels Decision. First, it is important to determine the real scope of the New York
decisions upon which the Brussels court is based. Second, it is necessary to examine the
property issue with respect to the Peruvian funds that had already been transferred to
Euroclear.
1.
162
Execution of the NY decisions
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As mentioned above163, Elliott sustained its request for an ex parte restraining

order before the Brussels court arguing, firstly, that the pari passu clause was going to be
violated by Peru, and secondly, that it had obtained two enforceable judgments from a
New York judge164. With respect to the latter argument, it is not perfectly clear from the
Brussels Decision which are exactly the two judgments referred to here. However, it is
assumed that the reference is made with regard to the two judgments issued by the Court
for the Southern District of New York, dated June 22nd, 2000 165, whereby Peru is finally
ordered to pay US$55,660,831.56 and, further, is authorized the execution of the decision
limited to property that is used for a commercial activity in the United States166.
Given the fact that the limitation included by the court for the execution of the
decisions was mentioned in both decisions, Elliott petitioned the court to amend the
decision against BN in order to delete such limitation, on the grounds that, being that BN
was considered as an instrumentality of a foreign state, the amount of its property subject
to judgment under 28 U.S.C. 1610(b) was greater than that of a sovereign state under 28
U.S.C. 1610(a). The dispute was finally decided in favor of Elliott167. The court
followed the reading of the Foreign Sovereign Immunities Act adopted by the
Restatement (Third) of the Foreign Relations Law of the United States, which expressly
states the following:
163
See supra, at 18.

See Brussels Decision Unofficial Translation, supra note 34, at 2.
165
See Elliott Associates, L.P. v. Banco de la Nacion 2000 WL 1449862 (S.D.N.Y.). (On June 22nd, 2000,
the Court for the Southern District of New York entered two judgments in favor of Elliott, one against
defendant BN for US$24,725,391.41, and another against Peru for US$55,660,831.56).
166
Id.
167
Id.
164
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For purposes of post-judgment attachment and execution,

the Foreign Sovereign Immunities Act draws a sharp
distinction between the property of states and the property
of state instrumentalities: (i) The property if states may be
attached only if it is or was used in commercial activity; the
property of state instrumentalities may be attached without
any such limitation, so long as the instrumentality itself is
engaged in commercial activity in the United States.168
In spite of the difference found by the court in the treatment of sovereign states
and its agencies or instrumentalities, it is important to notice for the purpose of this paper
that the execution of decisions against sovereign countries, or its agencies or
instrumentalities, is limited to property located in the U.S. This fact was clearly
recognized by the court in its decision when mentioning that [n]either party disputes the
fact that the FSIAs exception to immunity from attachment --whether for foreign states
or their instrumentalities-- extends at most to property located in the United States169.
Thus, it is clear that the execution of both June 22nd decisions was expressly
limited to property of Peru or BN in the U.S. In consequence, attempts made by Elliott to
execute such decisions over property located outside the boundaries of the U.S. were in
clear contempt of the New York courts order. Peru was aware of this issue170 and filed
motions in New York and Brussels to try to overturn Elliotts initiative171. However,
before such motions were resolved, the Brussels court entered its decision granting Elliott
168
Restatement (Third) of the Foreign Relations Law of the United States 460, cmt. b.
See 28 U.S.C. 1610(a), (b); Richmark Corp. v. Timber Fallnig Consultants, 959 F.2d 1468, 1477 (9th
Cir. 1992), cert. dismissed, 506 U.S. 948 (1992); Fidelity Partners v. Philippine Export & Foreign Loan
Guar. Corp., 921 F.Supp. 1113, 1119 (S.D.N.Y. 1996).
170
See Cymrot Memorandum, supra note 8, at 6 7.
171
See Id.
169
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the restraining order requested ex parte. The Brussels court never entertained the effects
of the limitation explicitly included in the June 22nd decisions. Surprisingly, it concluded
that the decisions were fully enforceable notwithstanding appeal, without even
mentioning the referred limitation.
Paradoxically, just shortly after Elliott and Peru settled their dispute, the issue
under analysis here was considered and decided by the New York court. In an opinion
with regard to a motion which Elliott had filed in August 2000, the New York court
rejected Elliotts argument that it was entitled to enforce the June 22nd decisions in
foreign countries172.
2.
Property over funds transferred to Euroclear
The second substantive issue that this last part of this paper is intended to address
is related to the property of the funds which were going to be transferred or had already
been transferred from Perus accounts to Euroclear for the payment of the Brady
interests. As it was explicitly ordered in the Brussels Decision, Euroclear (through its
operator, Morgan) was enjoined to instruct its cash correspondent banks not to have any
amounts credited in their accounts that originate from Peru, or if the funds were
nonetheless received, to block such funds and not to proceed with their distribution173.
What such order seems to suggest is that the funds subject to the injunction were property
of Peru all the time, not only before they were credited in the accounts of Euroclear cash
172
173
See Id., at 7.
See Brussels Decision Unofficial Translation, supra note 34, at 4.
-61-
correspondents but also after the transfer had occurred. Apparently, the Brussels court
followed the same interpretation adopted by the New York court with regard to Chase.
As can be recalled174, this court concluded that Chase, in its capacity as New York fiscal
agent for the Brady bonds, was acting as the agent of the debtor (Peru) and, therefore, all
funds held by Chase in such capacity were still the property of Peru. However, was
Euroclear the agent of Peru? Is it possible to argue that the funds already credited with
Euroclears cash correspondents were still the property of Peru? The answers to these
questions are of the utmost importance given that if it is determined that the transfer of
the property over the referred funds was perfected when these were credited with
Euroclear, then the order issued by the Brussels court would have been affecting property
of third parties. This is a matter, nonetheless, that deserves a careful analysis and a
detailed study of the rules relating to payment systems, with particular emphasis on the
rules applicable to Euroclear. Although interesting, the study of such a topic escapes the
scope of this paper, so the referred questions are left open for further discussion in the
future.
VI
CONCLUSION
It has been claimed that the Brussels Decision represents a serious threat to the
stability of international financial markets, not only with regard to sovereign lending but
also to the corporate bonds market. Based upon such a decision --the argument goes-174
-62-
creditors will be inclined to reject proposals to restructure international debts and to hold
out when presented with exchange offers. However, after analyzing what has been
explained above, the main conclusion which flows from the arguments is that the direct
repercussions and influence of the Brussels Decision in the world of international lending
should not be of great importance. First of all, it is very unlikely that any court in the
world would look at the Brussels Decision as a source of inspiration for holding that the
pari passu clause implies a pro rata rule. Such a decision is not a definitive conclusion of
law; it is not a decision on the merits, and therefore, it is not binding on Belgium courts.
Accordingly, there is no reason for having any U.S., English or other court taking such a
decision as a precedent.
Perhaps the real problem which arises from the Brussels Decision is the
introduction of an element of uncertainty in international financial markets. Despite all
the substantial inconsistencies of the decision and --from a formal standpoint-- its lack of
binding force, this decision represents the first formal recognition in the sovereign debt
arena that the pari passu clause gives the benefited party the right to be paid pro rata
with the rest of creditors comprised by the clause. Even if the arguments presented in this
paper are deemed to be irrefutable and, therefore, it is concluded that the aforementioned
decision is wrong, the real fact is that there is currently a court in Belgium which has --at
least provisionally-- formally concluded otherwise. And what this decision has really
proven to the international financial markets is not that they were wrong in connection to
the significance of the pari passu provision, but, instead, that they have never presented a
uniform understanding of the provision as a recognized term of art. What this decision
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has put forward is an evident general discrepancy with regard to the significance of the
referred clause. But even more importantly, this decision has shown that such a
discrepancy inevitably creates uncertainty, and that the practical effects of the latter may
be extremely dangerous for sovereign creditors.
Discrepancy amongst commentators regarding the term in question has been

public for a long time before the Elliott case. However, neither commentators nor the
players in the international financial context put much effort in trying to resolve the
controversy. Indeed, it seems that there was not a major incentive to reach a conclusion in
such regard since nobody could foresee the role that such a clause would eventually play
in the resolution of a sovereign debt dispute. It was probably thought that uncertainty on
this particular aspect could not be harmful. As mentioned above, it was a common belief
that the noncompliance with the pari passu clause could hardly entitle the affected party
to initiate a direct action. It was simply seen as a breach of a warranty or covenant whose
main purpose was to serve as an event of default which would then entitle the affected
party to accelerate the payment of its credit. Accordingly, what the Brussels Decision
demonstrates is that uncertainty as to the effects of breaching the pari passu clause may
have serious practical consequences. In this particular case, the Belgium court --assuming
an unwanted position for the international financial community-- barred the debtor from
paying other creditors unless it complies with the pro rata payment of the credit benefited
with the aforementioned clause.
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In sum, although the arguments explained above against the meaning assumed by
the Belgium court may have proven to be sound and reasonable, and probably any other
court presented with the same facts and arguments would certainly agree, the Brussels
Decision reflects that uncertainty can lead the way towards wrong reasoning and a most
unwanted result. Now, major players in the international financial arena are aware that
the lack of clarity in the interpretation of one of the boilerplate provisions of its contracts
opens up the possibility of having another decision contrary to their interest. Even if
convinced that, legally speaking, their arguments must prevail, these major players know
that it is possible to have another court erroneously interpreting the pari passu provision.
Accordingly, court decisions with regard to this matter have become less predictable in
the international financial context. And as it is widely acknowledged, unpredictability
increases the level of risk of international financial markets. As part of this risk,
unpredictability definitely plays its role in favor of holdout creditors, strengthening its
bargaining position in front of sovereign debtors. Despite the fact that mavericks in the
market cannot entirely rely on the Brussels Decision for not being a definite conclusion
of law, it is clear that the uncertainty can be regarded as a new psychological weapon in
the arsenal of holdout creditors. It is, therefore, necessary to adopt the steps required in
order to eliminate or, at least, minimize such a risk by eliminating the uncertainty
originated from the Brussels decision. This goal will not be achieved until any US court
(or English court for the case of debts subject to that jurisdiction) will reach a final
decision on this particular matter.
-65-
On the other hand, there have been several specific proposals to deal with the
problem of sovereign debt restructurings, viz., the introduction of collective action
clauses in new issues of sovereign debt instruments, the implementation of a standstill
system, and the organization of an international bankruptcy procedure for sovereigns,
amongst others. All of these proposals have been envisaged based on the premise that an
orderly restructuring of sovereign debt is indispensable for the goal of achieving global
financial stability, and have identified holdout creditors as the most dangerous menace
against such a goal and, therefore, as the main problem to be dealt with. However, when
defenders of such proposals conclude that the holdout problem is a real danger for
sovereign restructurings, they --without hesitation-- take the Elliott case as the main
example of what a holdout creditor can achieve and how dangerous it can be. The
problem with this is that the proponents take for granted the validity of the Brussels
Decision and overextend and generalize its legal effects. They assume that the Brussels
Decision can be used effectively by other creditors and be successfully employed as a
weapon against sovereign restructurings again. These premises, as explained above, are
doubtful and likely to be incorrect. What can be concluded from this paper is that the
outcome of the Elliott case was a result of a very particular situation and that should not,
in any case, influence other courts when making a decision on the merits.
Accordingly, given that the Brussels Decision should not be seen as a serious
weapon of holdout creditors, do these creditors really represent a credible threat against
sovereign restructurings? Apparently, they do not. It seems that holdout creditors were
not recognized as a threat per se before the Brussels Decision. Given their inability to
-66-
attach sovereign property outside the U.S., they were not deemed to be really capable of
jeopardizing any sovereign restructuring. A clear illustration of this point is the fact that
there have been proposals for sovereign bankruptcy procedures since the beginning of the
1990s, but neither commentators nor multilaterals showed any interest in them until after
the outcome of the Elliott case in Belgium. Consequently, if holdout creditors do not
represent a serious threat against sovereign restructurings, is it necessary to implement
any of the proposals referred to above? Apparently, it is not. If the danger which the
proposals are aimed at eliminating is no longer a threat, there seems to be no need to
implement any of them, unless, of course, there were any other goals which the proposals
are intended to achieve.
It could be argued that even if the Brussels Decision cannot directly be used as a
weapon against sovereign restructurings, the uncertainty that it creates (which has been
referred to above) may still represent a threat to be worried about and may, purportedly,
be used as a justification for the implementation of any of the aforementioned proposals.
What should be considered, however, is if the elimination of such uncertainty directly
from its source would not be a more cost-efficient solution than implementing any other
proposal. The question that should be addressed by commentators and specialists in the
field is what would occur if any U.S. or English court decided that the Brussels Decision
was wrong in its limited analysis and that, therefore, pari passu does not mean pro rata.
Would there still be the need to implement any of the referred proposals? As mentioned
above, the answer would seem to be negative, unless there are some other purposes
behind the proposals, other than eliminating the danger allegedly posed by hold out
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creditors. Thus, what can be clearly concluded from this discussion is that what
international financial markets really need urgently is to have any U.S. or English court
reaching a final and binding decision with respect to the topic under analysis, repealing
the interpretation adopted by the Brussels Decision.
----------------o----------------
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Sovereign Debt Restructuring: Should We Be Worried About Elliott?

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Sovereign Debt Restructuring: Should We Be Worried About Elliott?

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HARVARD LAW SCHOOL

International Finance Seminar

SOVEREIGN DEBT RESTRUCTURING:

EDUARDO LUIS LOPEZ SANDOVAL

THE ELLIOTT CASE: FACTUAL BACKGROUND AND POST-JUDGEMENT

What exactly happened?..8

The Brussels Court of Appeals Decision...17

The Opinion of Professor Andreas F. Lowenfeld..20

INTERPRETING THE PARI PASSU CLAUSE...24

Elements to be considered when interpreting the pari passu clause.36

Necessity to pay preferred creditors first....37

The role played by other clauses included in international loan

Variations on the conventional terms of the pari passu clause.44

International public policy issue: the holdout creditor problem...45

Rules for the Interpretation of International Loan Contracts.48

New York Rules49

FORMAL ASPECTS OF THE BRUSSELS DECISION.54

ADDITIONAL SUBSTANTIVE ISSUES58

Property over funds transferred to Euroclear.61

Such an interpretation was defended by Professor Andreas Lowenfeld, whose

creation of a secondary market for such instruments and, consequently, to an exponential

international bankruptcy procedure for sovereign debtors or the implementation of any

THE ELLIOTT CASE: FACTUAL BACKGROUND

What exactly happened?

In October 1996, Peru issued instructions to execute the Brady Exchange

Under such circumstances, Peru was facing a very complicated situation by

See Merrill Lynch Report, supra note 5, at 2.

Constrained by time pressure, Perus legal advisors25 devised a multi-level

See Merrill Lynch Report, supra note 5, at 2.

In addition, Perus advisors also considered the filing of motions challenging

See MEF Final Report, supra note 7, at 6.

The Brussels Court of Appeals Decision

According to the terms of the Brussels decision, Elliott challenged the

In sum, the Court of Appeals understood Elliotts motion as one intended to

Brussels Decision Unofficial Translation, supra note 34, at 2.

Representations and Warranties. - The Guarantor [i.e., the

The interpretation given by the Court of Appeals to the clause in question

Strategically speaking, the Brussels Court of Appeal decision (hereinafter referred

The Opinion of Professor Andreas F. Lowenfeld

Brussels Decision Unofficial Translation, supra note 34, at 3.

my conclusion is that the pari passu clause in the

Lowenfeld explains that there is no difficulty in understanding the literal meaning

Additionally, Lowenfeld expresses his disagreement with all those academic

See Blacks Law Dictionary, Sixth Edition, 1990.

A borrower from Tom, Dick and Harry cant say I will

See Lowenfeld Declaration, supra note 43, at 11.

Based on the aforementioned arguments, Lowenfeld concludes that Section 11(c)

INTERPRETING THE PARI PASSU CLAUSE

On the basis of its historically well recognized literal meaning, commentators

See Lowenfeld Declaration, supra note 43, at 13.

In a more comprehensive definition, the clause under consideration has been

Equality in priority of payment is evidently the key term in order to understand

As seen above, the interpretation suggested by Lowenfeld is straightforward and

It has been difficult to find commentators backing expressly what Lowenfeld

Lowenfeld Declaration, supra note 43, at 7.

The clause is primarily intended to prevent the earmarking

Vinod K. Agarwal, Negotiation of Specific Clauses of Loan Agreements, available at

preferring one set of creditors over the others or

[T]he sale of the debt at a discount of the true market

Notwithstanding the natural appeal of the Lowenfeld interpretation of the pari

The argument put forward by the aforementioned authors --regarding the

in case of a bankruptcy or compulsory distribution of the borrowers assets, the lenders

A lender who remains unpaid at a time when other