Courts as Information Intermediaries: A Case Study of Sovereign Debt Disputes

When foreign sovereigns default on their debt, creditors sometimes sue them. These creditors are sophisticated actors, and they sue even though courts can do little to force a sovereign to satisfy a judgment. Why do they sue? This Article argues that courts serve as information intermediaries that strengthen reputational enforcement in the international sovereign debt market. It shows, through a case study of sovereign debt defaults and disputes, three ways in which courts play this role. First, in hard cases, courts clarify reputational signals by publicly determining whether breach occurred. Second, through discovery and fact finding, they mitigate information asymmetries concerning aspects of sovereign behavior during default that are difficult to monitor. Third, they provide a forum for shaping the norms by which behavior is judged. The sovereign debt market thus relies on a hybrid of legal and nonlegal enforcement. Parties appeal to the law to determine rights and detect bad behavior. At the same time, they depend on reputation to discourage violations. Contracts scholars debate the extent to which nonlegal mechanisms such as reputation can support trade. Recognizing that courts can function as information intermediaries implies that courts can expand the range of markets that reputation can support. Under certain conditions, courts can supplement legal remedies by transmitting accurate and credible information about market participants’ expectations and behavior.