3
Court of Chancery to seize the proceeds from guano shipments. Peru had pledged the proceeds
as collateral, and commercial representatives in London were holding the money. If bondholders
could have succeeded anywhere, they should have prevailed in this case. Instead, the court
followed its predecessors in rejecting the petition on grounds of sovereign immunity. According
to the Master of the Rolls:
these so-called bonds amount to nothing more than engagements of honour, binding, so
far as engagements of honour can bind, the government which issues them, but are not
contracts enforceable before the ordinary tribunals of any foreign government, or even by
the ordinary tribunals of the country which issued them, without the consent of the
government of that country.
4
The situation prevailed well into the twentieth century. As Edwin Borchard, Professor of
Law at Yale, wrote in 1951, “The various attempts that have been made to sue defaulting states
in the creditor’s country, even where on occasion security has been attachable,” had failed
because of “the elementary principle that a foreign state cannot in principle, under established
rules of international law, be sued in municipal courts.”
5
Such threats may have become more
plausible in recent years, when both the United States and Britain relaxed the doctrine of
sovereign immunity, but they cannot explain why countries have attracted loans and repaid their
debts for centuries. Moreover, even if creditors could obtain a judgment today, they would have
trouble finding assets to attach, since most debtor governments do not hold significant physical
assets abroad, and they could repatriate vulnerable financial investments prior to default.
The second form of linkage has also been of limited historical significance. For most of
modern history the primary long-term creditors (private bondholders) had little ability to
withhold trade credits, which were supplied by separate actors with distinct and often opposing
interests. Governments nonetheless repaid their foreign debts. The situation changed during the
4
Judgmenmt of C.A. Jessel, Master of the Rolls, in Twycross v. Dreyfus [1876 T 177].
5
Borchard (1951: 166).
Convention