In an oft-told, but perhaps apocryphal, story, a student of Sigmund Freud, the father of psychoanalysis, asked Freud the significance of his fondness for cigars. Freud allegedly responded that “[s]ometimes a cigar is just a cigar,” suggesting that some things should be taken at face value, without delving for other meanings. Like Freud’s cigars, a pari passu clause in a sovereign debt instrument is best understood by taking it at face value and accepting the clause’s plain language meaning.
Focus on pari passu began in 2000 when Elliott Associates, L.P. (“Elliott”), then a holder of Peruvian debt, obtained a ruling from the Court of Appeal of Brussels adopting its plain language interpretation of the pari passu clause contained in loan documents issued by the Republic of Peru. The court, accepting Elliott’s argument that the clause required ratable payment to Peru’s creditors, issued an injunction prohibiting the payment of interest to Peru’s Brady bondholders because no payment was made to Elliott. This decision has generated debate amongst a number of practitioners, commentators, and scholars. The debaters generally fall into two camps: (1) those who oppose the equal treatment of creditors and as a result ignore or distort the terms of the contract, and (2) those who believe that the starting place for interpreting contractual provisions is the language of the contract and that covenants providing for equal treatment offer creditors important protections. As this Article points out, when it comes to contractual analysis, there is no real choice: the pari passu clause must be accepted at face value—as a provision bargained for by the parties to a sovereign debt transaction—as a provision that means just what it says.