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The International Convention on the Prevention of Odious Agreements: A Human Rights-Based Mechanism to Avoid Odious Debts

  • FRIEDRICH BENJAMIN SCHNEIDER
Abstract

There is a lively discussion as to whether debts incurred by despotic regimes and used to the detriment of the population are legally valid. This article gives a brief introduction to the concept of so-called odious debts and argues that a legal solution is not only desirable, but feasible. Subsequently, international human rights are identified as the missing link between the behaviour of the debtor state and the assessment of individual debts. Consequently, a human rights-based mechanism for the prevention of odious agreements is developed, based on an international convention annexed to this article. The convention provides that a state is classified as odious debts-prone if it is responsible for serious and systematic violations of human rights or international humanitarian law, or if its public sector is governed by severe and systemic corruption. Agreements concluded with an odious debts-prone state are void, unless the agreement complies with principles of responsible contracting as developed in this article. Finally, the scope of application of the convention and possible state parties are specified.

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1 Note, e.g., the discussion on the validity of debts incurred by the former government in Ukraine, as led by A. Gelpern, ‘Debt Sanctions Can Help Ukraine and Fill a Gap in the International Financial System’, Peterson Institute for International Economics, Policy Brief 14-20, available at <http://www.iie.com/publications/interstitial.cfm?ResearchID=2654> (accessed 6 May 2015), and in several legal blogs.

2 For example the Belgian Comité pour l'Annulation de la Dette du Tiers Monde (CADTM), the German erlassjahr.de or the US-american Probe International.

3 Norway in particular is promoting the discussion, see infra note 91; furthermore, the committee for foreign affairs and defence of the Belgian Senate has urged for the audit of odious debts, notably in Tunisia, see Resolution 3-1507/6, Proposition de Résolution sur l'Annulation de la Dette des Pays les Moins Avancés, 27 March 2007, paras. 10–12, and Resolution 3-1507/6, Proposition de Résolution sur l'Annulation de la Dette des Pays les Moins Avancés, 27 March 2007.

4 See the reports initiated by the World Bank by V. Nehru and M. Thomas, ‘The Concept of Odious Debt: Some Considerations’ (2008), available at <elibrary.worldbank.org/content/workingpaper/10.1596/1813-9450-4676> (accessed 6 May 2015, with critical commentary by Michalowski, S. and Bohoslavsky, J., ‘Ius Cogens, Transitional Justice and Other Trends of the Debate on Odious Debts: A Response to the World Bank Discussion Paper on Odious Debts’, (2009) 48 Colum.J.Transnat'l. L. 59113, and Paulus, C., ‘The Evolution of the “Concept of Odious Debts”’, (2008) 68 ZaöRV 391, at 391–429.

5 At the level of UNCTAD, a panel at the ‘Sixth Debt Management Conference’, 19–21 October 2007, dealt with odious debts. See also the UNCTAD discussion paper by R. Howse, ‘The Concept of Odious Debt in Public International Law’ (2007), available at <www.unctad.org/en/docs/osgdp20074_en.pdf> (accessed 6 May 2015).

6 In his report, the UN Independent Expert on the Effects of Foreign Debt and Other Related International Financial Obligations of States on the Full Enjoyment of All Human Rights, Particularly Economic, Social and Cultural Rights calls for the cancellation of all odious credit export agency debt, see Report of 5 August 2011, A/66/271, paras. 17 and 55(f).

7 European Union: European Parliament, Resolution on EU Trade and Investment Strategy for the Southern Mediterranean Following the Arab Spring Revolutions, 10 May 2012, Res. 2011/2113(INI), Consideration 6.

8 A former tsarist minister, Sack taught law in France and the USA. On the controversial person of Sack see Ludington, S. and Gulati, G., ‘A Convenient Untruth: Fact and Fantasy in the Doctrine of Odious Debts’, (2008) 48 Vay.J.Int'l. L. 595, at 595–639.

9 See Sack, A. N., Les Effets des Transformations des États sur leurs Dettes Publiques et Autres Obligations Financières. I - Dettes Publiques (1927), 157 et seq.

10 Ludington, S.et al., ‘Applied Legal History: Demystifying the Doctrine of Odious Debts’, (2010) 11 Theoretical Inquiries in Law 247, at 247–81, at 250 et seq. with further references.

11 Memorandum of American Peace Commission, Paris, 14. October 1898, printed in Moore, J. B., A Digest of International Law (1906), at 358 et seq.

12 M. Bedjaoui, Ninth Report on Succession of States in Respect of Matters other than Treaties, UN Doc. A/CN.4/301 and Add.1 (1977), YBILC 1977 (II/1), 7 et seq., at para. 160.

13 See, e.g., A. Khalfan et. al., ‘Advancing the Odious Debt Doctrine’, CISDL Working Paper (2003), available at <http://cisdl.org/public/docs/pdf/Odious_Debt_Study.pdf> (accessed 6 May 2015), and the references in notes 16 and 17.

14 Cassese, A., International Law (2005), at 77.

15 See Paulus, supra note 4, at 409 for further references.

16 Notably Bedjaoui, supra note 12, at para. 115; Howse, supra note 5, at 10 et seq.; King, J., ‘Odious Debt: The Terms of the Debate’ (2007) 32 N.C.J.Int'l L.& Com.Reg. 605, at 605–67, at 614 and 620 as well as a number of debt relief NGOs.

17 See, for instance, Buchheit, L.et al., ‘The Dilemma of Odious Debts’, (2007) 56 Duke L.J. 1201, at 1201–2, at 1230; Michalowski, S., Unconstitutional Regimes and the Validity of Sovereign Debt. A Legal Perspective (2007), at 43 et seq. with further references; Nehru and Thomas, supra note 4, at 14 et seq.; Paulus, supra note 4, at 415 et seq.

18 See below, Part 3.

19 The successor government under Ortega first declared not to service the debts, but then backed away in order to preserve good relations to Western states, see Jayachandran, S. and Kremer, M., ‘Odious Debt’ (2006) 96 Am.Econ.Rev. 82, at 86.

20 In the case of Indonesia, the USA insisted on the servicing of its debt, see Stiglitz, J., ‘Odious Rulers, Odious Debts’, The Atlantic, November 2003, at <www.theatlantic.com/past/docs/issues/2003/11/stiglitz.htm> (accessed 6 May 2015).

21 See, for instance, Rajan, R., ‘Odious or Just Malodorous?’, (December 2004) Finance & Development 54, at 55.

22 Feibelman, A., ‘Contract, Priority, And Odious Debt’, (2007) 85 N.C.L. Rev. 727–72, at 733 et seq. with further references; S. Jayachandran et. al., ‘Applying the Odious Debts Doctrine while Preserving Legitimate Lending’ (2006), available at <http://iis-db.stanford.edu/evnts/4930/ApplyingtheOdiousDebtsDoctrine.pdf> (accessed 6 May 2015), at 5.

23 Buchheit, L. and Gulati, G., ‘Odious Debts and Nation-Building: When the Incubus Departs’, (2008) 60 Me.L.R. 477, at 485.

24 Interview with the Iraqi Minister of Finance, quoted in Gelpern, A., ‘What Iraq and Argentina Might Learn from Each Other’ (2005) 6 Ch. J. Int'l. L. 391, at 406.

25 The figure relates to Paris Club debt and private debt, see Club de Paris/Paris Club, ‘The Paris Club and the Republic of Iraq Agree on Debt Relief’, Press Release, 21 November 2004, available at <http://www.clubdeparis.org/sections/communication/archives-2004/irak6017> (accessed 6 May 2015) and A. Gelpern, ‘Odious, not Debt’ (2007) 70 LCP, at 89 for further references.

26 N. Gelpern, supra note 24, at 400 et seq.

27 Feilchenfeld, E. H., Public Debts and State Succession (1931), 339 et seq. estimates the legitimate part to be about 25 per cent.

28 With further references: Bolton, P. and Skeel, D., ‘Odious Debts or Odious Regimes?’, (2007) 70 LCP 83, at 89; see also Choi, A. and Posner, E., ‘A Critique of the Odious Debt Doctrine’, (2007) 70 LCP 33, at 44.

29 Ben-Shahar, O. and Gulati, G., ‘Partially Odious Debts’, (2007) 70 LCP 47, at 65 et seq. argue that it is more difficult to misuse tax revenues than loans; however, this implies a minimum of public control, which is often lacking in despotic regimes.

30 See the economic model by Jayachandran and Kremer, supra note 19, at 88.

31 Jayachandran et. al., supra note 22, at 22.

32 On sanctions on Iraq and their effects on human rights see Coomans, F., ‘The Extraterritorial Scope of the International Covenant on Economic, Social and Cultural Rights in the Work of the United Nations Committee on Economic, Social and Cultural Rights’, (2011) 11 HRLR 1, at 10 with further references.

33 For this argument, see Jayachandran et. al., supra note 22, at 5, and Center for Global Development, ‘Preventing Odious Obligations. A New Tool for Protecting Citizens from Illegitimate Regimes’ (2010), available at <http://www.cgdev.org/files/1424618_file_Odious_Debt_FINAL_web.pdf> (accessed 6 May 2015), at viii.

34 This follows from principles of political philosophy, according to which the government has the duty to act in the interest of its population, as well as from principles of unjustified enrichment; on the first argument, see Purdy, J. and Fielding, K., ‘Sovereigns, Trustees, Guardians: Private-Law Concepts and the Limits of Legitimate State Power’, (2007) 70 LCP 165, at 167 et seq.; on the second argument, see L. Buchheit et al., supra note 17, at 1224.

35 Paulus, C., ‘“Odious Debts” v. Debt Trap: A Realistic Help?’, (2005) 31 Brook.J.Int'l L. 83, 95.

36 Pérez, L. and Weissman, D., ‘Public Power and Private Purpose: Odious Debt and the Political Economy of Hegemony’, (2007) 32 N.C.J.Int'l L.& Com.Reg. 699, at 718.

37 See Gray, D., ‘Devilry, Complicity, and Greed: Transitional Justice and Odious Debt’, (2007) 70 LCP 137, at 148 et seq., referring to genocide in Rwanda and Nazi Germany.

38 See, for instance, the approach by King, supra note 16, at 655.

39 In this direction S. Michalowski, supra note 17, at 100 et seq.; further solutions are offered by Ben-Shahar and Gulati, supra note 29; Bolton and Skeel, supra note 28; Buchheit et al., supra note 17; Center for Global Development, supra note 33; Feibelman, supra note 22; King, in Khalfan et al., supra note 13, at 42 et seq.; Paulus, supra note 35; Pogge, T., ‘Achieving Democracy’, (2007) 21 Ethics & International Affairs 249, at 249–73; see also infra, note 43.

40 Some references to human rights can be found in Bolton and Skeel, supra note 28, at 95 et seq.; King, supra note 16, at 651; Michalowski and Bohoslavsky, supra note 4, at 89 et seq.; Paulus, supra note 35, at 98.

41 See especially Art. 25 ICCPR.

42 As an example, note the delivery of chemicals to Iraq by a German company, described in J. Kaiser and A. Queck, ‘Odious Debts – Odious Creditors? International Claims on Iraq’ Dialogue on Globalization Occasional Papers (2004), available at <http://library.fes.de/pdf-files/iez/global/02018.pdf> (accessed on 6 May 2015), at 21.

43 This mechanism draws on the approach offered by Jayachandran et al., supra note 22, refined by the Center for Global Development, supra note 33. With the present article, especially the criteria for the classification as odious debts-prone are elaborated, as well as the institutional design, which both aim at establishing an objective and legally-shaped mechanism. In addition, para. 3 of this article specifies principles for legitimate contracting with classified states.

44 See above, Part 3.2.

45 The UNCTAD Principles on Promoting Responsible Sovereign Lending and Borrowing of 10 January 2012 are available at <www.unctad.info/upload/Debt%20Portal/Principles%20drafts/SLB_Principles_English_Doha_22-04-2012.pdf> (accessed 6 May 2015); see also Buchheit, L. and Gulati, G., ‘Responsible Sovereign Lending and Borrowing’, (2010) 73 LCP 63, at 63–92 et seq.

46 See the behaviour of Ecuador, discussed in Porzecanski, A., ‘When Bad Things Happen to Good Sovereign Debt Contracts: The Case of Ecuador’, (2010) 73 LCP 251, at 251–71.

47 See, for instance, Shafter, J., ‘The Due Diligence Model: An Executive Approach to Odious Debt Reform’, (2007) 32 N.C.J.Int'l L.& Com.Reg. 669, at 669–98, at 691, who suggests creating an institution within the US executive branch for this decision. See also S. Bonilla, Odious Debt. Law-and-Economics Perspectives (2011), 126 et seq., who suggest the Paris Club as an appropriate institution.

48 See Part 4.

49 See below, Part 5.3.

50 See, for instance, Resolution of the Security Council, 30. March 2011, S/RES/1975 (2011), para. 12 (‘serious violations’); Resolution of the Security Council, 26. February 2011, S/RES/1970 (2011), preamble (‘gross and systematic violations’).

51 The term ‘serious and systematic violations of principles laid down in certain international conventions concerning core human rights and labour rights’ is used in the EU's Generalized Scheme of Preferences for the withdrawal of trade preferences, see Reg. 978/2012 of the European Parliament and the Council, 25 October 2012, [2012] OJ L 303/1, at Recital 24 and Art. 19(1)(a). However, this clause has been invoked rarely and without a systematic interpretation of the terms, see Schneider, F., ‘Human Rights Conditionality in the EU's Generalized System of Preferences: Legitimacy, Legality and Reform’, (2012) 15 ZEuS 301, 309 et seq.

52 See also the list of core international human rights instruments of the OHCHR, available at <www.ohchr.org/EN/ProfessionalInterest/Pages/CoreInstruments.aspx> (accessed 6 May 2015).

53 The ratifications are available at <treaties.un.org/Pages/Treaties.aspx?id=4&subid=A&lang=en> (accessed on 6 May 2015).

54 It has to be noted that the review periods differ from two to five years. As a consequence, the reports are not necessarily a useful indicator of the current situation in a specific country. However, taken with all other sources available, they form an important basis for assessment of a country's human rights record.

55 Currently, there are 14 country-specific Special Procedures, see the list on <www.ohchr.org/EN/HRBodies/SP/Pages/Countries.aspx> (accessed 6 May 2015).

56 See the list on <www.ohchr.org/EN/Countries/Pages/MapOfficesIndex.aspx> (accessed 6 May 2015).

57 See, for instance, ICJ, Legal Consequences of the Construction of a Wall in the Occupied Palestinian Territory, Advisory Opinion of 9 July 2004, [2004] ICJ Rep. 136 et seq.

58 See Boersma, M., Corruption: A Violation of Human Rights and a Crime under International Law? (2012), at 103 et seq., especially 195 et seq.; see also Corruption and its Impact on the Full Enjoyment of Human Rights, in Particular Economic, Social and Cultural Rights, Working Paper Submitted by Ms. Christy Mbonu in Accordance with Sub-Commission decision 2002/106, 14. May 2003, E/CN.4/Sub.2/2003/18, para. 3.

59 For instance, the UN Convention against Corruption has 167 contracting parties, and the UN General Assembly has condemned Corruption in several resolutions, e.g. A/RES/91/151, 16 December 1996; A/RES/51/59, 28 January 1997; A/RES/58/4, 31 October 2003.

60 See also the definition by the anti-corruption organization U4: ‘As opposed to exploiting occasional opportunities, endemic or systemic corruption occurs when corruption is an integrated and essential aspect of the economic, social and political system. Systemic corruption is . . . a situation in which the major institutions and processes of the state are routinely dominated and used by corrupt individuals and groups. . .’, available at <www.u4.no/glossary/> (accessed 6 May 2015).

61 See the definition by M. Boersma, supra note 58, at 28; the World Bank defines corruption as ‘the abuse of public office for private gain’, World Bank, Helping Countries Combat Corruption – The Role of the World Bank, September 1997, available at <www.worldbank.org/publicsector/anticorrupt/corruptn/corrptn.pdf> (accessed 6 May 1995), at 8.

62 See the corruption-related criteria in the IDA Resource Allocation Index (IRAI), available at <www.worldbank.org/ida/IRAI-2011.html> (accessed 6 May 2015), and the Governance and Anti-Corruption Diagnostics, available at <www.go.worldbank.org/QFWZEIB1C0> (accessed 6 May 2015).

63 See the corruption-related criteria in the Bank's Governance Ratings, available via <www.cpia.afdb.org/> (accessed 6 May 2015).

64 Such as the Bertelsmann Foundation with its Sustainable Governance Indicators, available at <www.bertelsmann-stiftung.de/cps/rde/xchg/SID-286810B2-3A83DA88/bst_engl/hs.xsl/52957.htm> (accessed 6 May 2015).

65 E.g. the IMF, the Council of Europe's Group of States Against Corruption (GRECO), or the Follow-Up-Mechanism MESICIC to the Inter-American Convention Against Corruption.

66 The Third version of The Equator Principles, June 2013, is available at <www.equator-principles.com/resources/equator_principles_III.pdf> (accessed 6 May 2015); on the second version, see Conley, J. and Williams, C., ‘Global Banks as Global Sustainability Regulators? The Equator Principles’, (2011) 33 Law & Policy 542, at 542–75.

67 The list of members is available at <www.equator-principles.com/index.php/members-reporting> (accessed 6 May 2015).

68 See the classification in Principle 1; furthermore, the principles are only applicable for project financing of US$ 10 million or more, see Equator Principles – Scope.

69 The World Bank Operations Manual, Operational Policies (OP) 13.05 of July 2001, revised, at paras. 1 and 2, available at <http://go.worldbank.org/DZDZ9038D0> (accessed 6 May 2015).

70 The World Bank Operations Manual, Bank Procedures (BP) 13.05 of July 2001, revised, at para. 1.

71 The World Bank Operations Manual, BP 13.05, at para. 23.

72 In this direction see Paulus, supra note 35, at 95 et seq.

73 Some of these elements can be found in the World Bank's project implementation plan, see The World Bank Operations Manual, BP 10.00 – Annex B, January 1994.

74 Ben-Shahar and Gulati, supra note 29, at 71; according to Conley and Williams, supra note 66, at 560, this is already the case in the field of risk management for project financing.

75 See also Art. 7(4) of the draft ICPOA, according to which the courts will work towards consistent legal practice by taking into consideration decisions by other courts of states parties to the convention.

76 E.g. the United Nations Office at Geneva, the Office of the United Nations High Commissioner for Human Rights and human rights treaty bodies such as the Human Rights Committee and the Committee on Economic, Social and Cultural Rights.

77 See Art. 28 et seq. ICCPR, especially Art. 28(2) and 31(2).

78 On this development, see Young, K. A., The Law and Process of the UN Human Rights Committee (2002), at 50 et seq.

79 See the proposal by Tyagi, Y., The UN Human Rights Committee. Practice and Procedure (2011), at 81 et seq. and 147 et seq. for the Human Rights Committee.

80 This reduces the workload for each individual member and ensures quicker decisions.

81 E.g. the approach by Jayachandran et al., supra note 22 (‘loan sanctions’).

82 In this direction Chander, A., ‘Odious Securitization’ (2004) 53 Emory L.J. 923, at 924 et seq.; see also the mechanism suggested by the Center for Global Development, supra note 33 (economic agreements). By contrast, tortious liabilities should be excluded because the creditor has no possibility of preventing their emergence and would therefore be unjustly disadvantaged.

83 Jayachandran et al., supra note 22, at 6 et seq. and 15, at note 18.

84 In this direction Paulus, supra note 35, at 93.

85 House of Lords, Tinsley v. Milligan, [1994] 1 AC 340, at 354 et seq.

86 The objection ex iniuria ius non oritur was explicitly admitted by the International Court of Justice, Gabčíkovo-Nagymaros Project (Hungary v. Slovakia), Judgment of 25 September 1997, [1997] ICJ Rep. 7, at 133.

87 Paulus, supra note 35, at 100 with further references.

88 See the World Bank data available at <http://data.worldbank.org/indicator/NY.GDP.MKTP.CD> (accessed 6 May 2015).

89 See above, Part 3.2.

90 See Center for Global Development, supra note 33, at 8 et seq.

91 See The Norwegian Ministry of Foreign Affairs, ‘Debt Relief for Development. A Plan of Action’ (2004), available at <http://www.regjeringen.no/upload/kilde/ud/rap/2004/0225/ddd/pdfv/217380-debtplan.pdf> (accessed 6 May 2015), at 19 et seq.; in 2006, Norway cancelled debts of about 63 million euros towards developing countries because of its creditor co-responsibility, see ‘Cancellation of Debt Resulting from the Norwegian Ship Export Campaign (1976–1980)’, Press Release and Fact Sheet, 2 October 2006, available at <http://www.regjeringen.no/nb/dep/ud/pressesenter/pressemeldinger/2006/cancellation-of-debts-resulting-from-the.html?id=272158> (accessed 6 May 2015).

92 As quoted by Panizza, cited in Nierlich, R. and Schneider, F., ‘Conference Report: A Debt Restructuring Mechanism for European Sovereigns – Do We Need a Legal Procedure?’, (2012) 3 IILR 392, at 404.

* Friedrich Benjamin Schneider, Dr. iur. (Humboldt-Universität zu Berlin), LL M (University of Nottingham) []. This article is based on the author's doctoral thesis, ‘Odious Debts’, Berlin 2015. The author would like to thank Safoora Teli for precious comments.

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