Legislative Memo

Ken Pokalsky
Vice President of Government Affairs
T 518.465.7511


S.3767-C (Bonacic) / A.7967-A (Simotas)



Contracts Governing Debt Obligations of Foreign States



June 11, 2012


The Business Council strongly opposes this legislation which seeks to modify New York’s application of the “merger” doctrine with respect to judgments against foreign sovereigns. 

This legislation raises several significant problems. The bill is unnecessary because New York common law appropriately addresses the rights attendant to a judgment. Moreover it creates a significant risk to New York’s standing as a jurisdiction of choice for international borrowings and commerce.  This bill does not clarify state law as it purports to but rather changes state law for the benefit of one entity.

Under existing principles of New York common law, the merger doctrine is not applied in a rigid manner that defeats a party’s equitable rights. New York’s Court of Appeals has held that the merger doctrine “will not be carried any further than the ends of justice require” and a judgment does not change the essential nature and real foundation of the cause of action.” Jay’s Stores, Inc. v. Ann Lewis Shops Inc., 204 N.E. 2nd 638, 642 (N.Y. 1965).  As the sponsor’s memo indicates, “covenants that aid creditors in a post-judgment and enforcement context are not merged into final judgments, but survive the entry of judgment.”

With the merger doctrine all of the plaintiff’s prior claims are superseded by the judgment in the case, which becomes the plaintiff’s sole means of recovering from the defendant. Support of this bill is based on the perceived idea that a debtor nation in a case may try to use the merger doctrine to undermine the rights a creditor has to the underlying claim by arguing that a particular right or benefit should merge into the judgment and be extinguished.

To the extent that judgment creditors would seek to rely on contract provisions in order to enforce or collect their unsatisfied judgments, the decision in Jay’s Stores seems supportive of their position and we should let the courts decide the issue. New York’s courts have established precedent on how to rule on the merger doctrine without the need for legislation to clarify a problem that does not exist.

Another problem with this legislation is that it undermines New York’s brand as an impartial forum for legal adjudication of disputes and the center for financial activities.  Many foreign sovereigns designate New York as the place to borrow money, and contract with other parties. Foreign sovereigns waive immunity and consent to jurisdiction in New York courts because of its reputation for the highest legal standards.  These same sovereigns however will be reluctant to participate in a legal system that is changed to expressly affect their ability to rely on the merger doctrine.

Why would a foreign sovereign continue to select New York law to govern its contracts or submit to its jurisdiction when the law is changed to allow an aggrieved party to continue to pursue legal claims against them post judgment?  Selective changes to common law doctrines in order to improve the litigation position of one party over that of another does not foster confidence in the stability and predictability of New York’s Courts.

This would have an enormous impact on international borrowing transactions by sovereigns, diminishing New York’s role in international capital markets and damaging business relationships New York companies currently have with foreign sovereigns.

A judgment for the benefit of a creditor does not equate to payment and this legislation cannot change that fact. Every day judgments go uncollected as judgment debtors are found to be insolvent or seek bankruptcy protection. The risks of certain transactions must be taken into account by parties. It is not the role of the legislature to disregard or attempt to correct such risks.

For all of the foregoing reasons, we urge the legislature to decline passage of this legislation.