As the Republic of South Sudan makes its first steps as a sovereign state, A&O's Camille Astier and Philip Wood investigate the legal intricacies that arise when a new country is formed

On Saturday 9 July 2011, the Republic of South Sudan became the 193rd sovereign state. And with the establishment of any new country, there are ultimately legal consequences that need to be addressed. Last January, 98.83% of the people in Southern Sudan voted for independence from the North in a national referendum. This resulted in the creation of the world's newest nation – the Republic of South Sudan – on 9 July 2011.

Although the establishment of new sovereign states happens more often than one may think (East Timor, Montenegro and Kosovo all became independent nations in the last decade), there are always questions pertaining to the resulting legal consequences. For Sudan, the key question revolves around the status of Sudan's debt claims and the existing contracts entered into with the Republic of Sudan in respect of the resources of the South.

What is the CPA?

The Comprehensive Peace Agreement (CPA) is actually a mosaic of different treaties reached between 2002 and 2005, packaged together under the umbrella of 'peace agreement'. It marked the end of the longest African civil war. It is important to note that the prospect of a referendum on independence from the North (which is only contemplated in one sentence in the CPA) was always only intended to be a fail-safe fallback option.

In 2005, the emphasis was on a reformed, peaceful and unified Sudan under the presidency of a visionary leader such as rebel leader Dr John Garang (who signed the CPA on behalf of South Sudan). However, Garang died only a few weeks after signing, and in the absence of a unifying figure, the self-determination referendum for the people of South Sudan became an exit strategy.

Will the Republic of South Sudan have its own constitution and laws?

The Republic of South Sudan already has its own constitution (the Transitional Constitution which was ratified on 7 July 2011 by the South Sudan Legislative Assembly and came into force on the independence day of South Sudan two days later).

In terms of law, the situation is quite complex – there are currently three co-existing legal frameworks. Since the CPA, a large drafting effort has taken place in South Sudan and a few South Sudan laws have been adopted (such as the Judiciary Act, Limited Partnerships Act and Contract Act). However, there are still large gaps (ie, corporate laws, insolvency laws, etc), and either the 'bush laws' (ie, over 30 laws enacted by the provisional government of the New Sudan in 2003, although these laws were never really recognised constitutionally) or the laws of the Republic of Sudan fill the bridge.

Are the predecessor state's international legal obligations transferred to the successor state?

In some cases of state succession, partition treaties dealing with key issues relating to the succession (including who remains responsible for the obligations entered into by the predecessor state) are agreed in advance of the secession.

There are many historic examples of this, such as the famous Treaty of 1921 between the UK and the Irish Free State or the Indian Independence Act of 1947. However, despite lengthy negotiations, no partition treaty has yet been agreed between the Republic of Sudan and the Republic of South Sudan. Accordingly, in the absence of a 'divorce agreement', international public law becomes essential to resolve any potential legal issues.

The essence of the fundamental question as to whether the successor state is bound by the predecessor state's obligations is actually twofold: (i) whether the successor state inherits the contracts entered into by the predecessor's state and (ii) if so, whether the successor is entitled to alter or cancel the contractual rights because of the change of sovereignty.

There are no clear cut answers to these questions but there is some international practice demonstrating that: (i) successor states may be willing to recognise contracts entered into by predecessor states, but (ii) disavowal of pre-existing contracts does happen.

This may open the door to other forms of redress, including adequate and effective compensation in the event of expropriation. Foreign entities may also be able to rely on bilateral investment treaties to bring compensation claims if the successor state continues to acknowledge that the bilateral investment treaty is still in force.

Based on the same principles, no special state succession rules apply to obligations under concession contracts. However, negotiations between the Republic of South Sudan and the Republic of Sudan in relation to oil contracts are still ongoing, so hopefully certainty will soon be obtained.

It may also be worth pointing out that a wide-ranging and independent survey of Sudanese oil concession contracts has recently concluded that the terms of those contracts are in keeping with general market practice and represent good value for the state.

What about debt claims?

Depending on the type of debt, the answer varies.

- Debt contracted by a public authority which is inferior to a state and a separate legal entity and has a degree of financial autonomy (ie, local debt) will not be impacted by the partition.

- Debt contracted with the predecessor state but which is linked to the territory of the successor state (ie, localised debt) should transfer to the Republic of Sudan without too much trouble. l However, in relation to national debt (ie, debt not related to a particular territory or assets and which is charged to the general revenue account), international practice is disparate: it seems that predecessor states usually remain bound but there are various cases of successor states agreeing to take on a portion of the debt to demonstrate their creditworthiness.

In the case of Sudan, there is strong pressure on the Republic of Sudan to let the Republic of South Sudan walk free of debt. This is a central plank of the 'grand bargain' being negotiated by the North and South: it would allow the Republic of Sudan to join the select club of heavily indebted poor countries, making it not only eligible for substantial debt relief but also opening the door to foreign recognition in the hope that the US sanctions still in force against the Republic of Sudan would be lifted.

What are the challenges ahead for South Sudan?

Although the Government of South Sudan has put foreign investors who had contracted with the Republic of Sudan on notice that their contracts may be renegotiated, there is a strong international practice, demonstrating that the renegotiation of contracts is unusual. In any event, the Republic of South Sudan has other fish to fry. Far from a panacea, many fear that with the various tribal conflicts in the South, secession could lead to the 'Somalisation' of South Sudan. Specifically, there is some concern that the new transitional constitution of the Republic of South Sudan (which has just been approved by the Parliament) may give extreme powers to one party, but it remains to be seen how this constitution will be used in practice.

Added to this must be concern that the unresolved aspects of the CPA – the status of Abyei, Blue Nile and of South Kordofan (both of which have witnessed open warfare in recent weeks), the failure to successfully disarm, demobilise and reintegrate former soldiers – will lead to further tension and instability.

And yet, Sudan-watchers are all too familiar with the pattern of brinkmanship in Sudanese affairs over the past six years. It is in no-one's interests that the experiment of the New Sudan – now restricted to the south of the former larger country – should fail. The habit of dialogue and development pursued not only by the leaders of the South but of both North and South gives cause for hope that South Sudan will emerge as an inspiration for other African states.

As a message on the Government of Southern Sudan's website states: "The eyes of the world are on us. Everyone is watching us closely to see whether our first steps in nationhood are steady and confident. We must rise to the occasion and prove that we are capable of playing our honest part in the international community of nations."

Camille Astier and Philip Wood work for Allen & Overy's global law intelligence unit.