5 - The Pari Passu Clause

Summary

The pari passu clause in modern sovereign debt instruments may be interpreted and implemented in a manner that it constitutes part of the regulatory framework of sovereign debt restructuring. A careful reading of the NML saga revealed that US courts did not necessarily endorse the so-called ratable payment interpretation in rejecting the legal ranking interpretation; the US courts introduced ratable payment as a matter of injunctive relief for the violation of the pari passu clauses by Argentina and did not provide it as a proper interpretation of the clauses. Alternatively, this study has endorsed a third interpretation of the pari passu clauses according to which these clauses provide additional but limited protection from unfair discrimination among bondholders by the debtor sovereign in the process of debt restructuring. This interpretation may represent an appropriate balance between bondholder protection and respect for debt restructuring. In addition, the ratable payment as injunctive relief can be conceived as a regulatory implementation of pari passu clauses addressing a particular serious category of the breach of sovereign bond contracts.