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Abstract

In October 2019, Petróleos de Venezuela, S.A. (PDVSA), a Venezuelan state owned oil and natural gas company, filed a complaint against the trustee and the collateral agent of PDVSA’s bondholders, alleging that certain bonds due in 2020 issued in exchange for the defaulted bonds due in 2017 are null and void ab initio. The main cause of action was that the 2020 bonds had been issued in violation of the provisions of the Venezuelan Constitution. This contention was advanced notwithstanding that the 2020 bonds provide that “all matters arising out of or relating in any whatsoever” to the instruments shall be governed by the law of New York. At the same time, New York’s conflict-of-laws statute contains a rule providing that “[t]he local law of the issuer’s jurisdiction … governs … the validity of a security,” which was discovered and invoked by the (sub-)sovereign debtor as a relatively uncommon ground for the repudiation of its external debt. The federal district court dismissed the plaintiffs’ contention by adopting a narrow reading of the term “validity” within the meaning of New York’s conflict of-laws rule, whereas the Court of Appeals of New York State showed an opposite but nuanced interpretation by concluding that Venezuelan law does govern the validity of the PDVSA’s bonds, but with the repeated caveats that the consequences of eventual invalidity remain to be governed by New York law. The present article examines the governing law of sovereign debt issued allegedly in contravention of the sovereign debtor’s constitutional and budgetary constraints, with special reference to the case brought by PDVSA before New York courts. It aims to identify the role of private international law as a device for global governance by which the application of a sovereign’s budgetary disciplines is ensured to serve the public policy objectives of sovereign debt sustainability.

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