The Black Hole Problem in Commercial Boilerplate

By Choi, Stephen J.; Gulati, Mitu et al. | Duke Law Journal, October 2017 | Go to article overview

The Black Hole Problem in Commercial Boilerplate


Choi, Stephen J., Gulati, Mitu, Scott, Robert E., Duke Law Journal


ABSTRACT

Rote use of a standard-form contract term can erode its meaning, a phenomenon made worse when the process of encrustation introduces various formulations of the term. When they occur, rote usage and encrustation weaken the communicative properties of boilerplate terms, leading some terms to lose much, if not all, meaning. In theory, if a clause is emptied of meaning, it can create a contractual black hole in which, as the term loses meaning, random variations in language appear and persist. What, then, are the consequences if parties exploit these variations in language by success fully advancing an interpretation the market disavows? Traditional doctrine holds that even if the court errs in the meaning it gives to a clause, parties have an incentive promptly to revise the standard language to exclude the aberrant interpretation. But what if the assumptions about the costs and motivations to revise this type of boilerplate are wrong? We seek purchase on this question with u study of the pari passu clause, a standard provision in sovereign debt contracts that almost no one seems to understand. This clause gained fame in 2011 because of a series of court decisions in New York arguably misinterpreting a particular variation of the clause. Even though the courts' interpretation put at risk a multitrillion dollar debt market, meaningful revisions to the language of the boilerplate term did not begin to appear until late 2014. In the interim, trillions of dollars in bonds were issued with an uncorrected version of the term. Market forces, in other words, worked slowly to remedy a systemic problem that caused substantial costs. We ask whether the state could do more to avoid the problem at the front end rather than depend on market forces to correct court error at the back end.

Table of Contents

Introduction
  I. When Standardized Contract Terms Become Rote and Encrusted
 II. A Prototypical Example: The Pari Passu Clause
     A. The Inquiry: Does the Market Repair Black Holes?
     B. The History of Pari Passu Litigation
III. The Post-Litigation Data
     A. Data Sources and Coding
     B. Major Changes to the Core Language of Pari Passu
     C. Minor Revisions: Modifications That Might Influence
           Interpretation or Scope
        1. The Evidentiary Patch
        2. Scope of the Clause
     D. The Empirical Results of the Post-Litigation Study
        1. All Issuers
        2. Pure Sovereign Issuers
        3. The October Meetings
        4. The Pattern of Changes in Boilerplate: Rational
           Design or Random Mutation
     E. Interviews with Market Players
        1. Reasons for the Lack of Revision as of October 2014
        2. The Courts Failed to Solve a Systemic Problem
     F. Reports from the Clients
        1. The Reasons That Might Induce Revision: Standard
           Practice and Investor Preference
        2. Interviews with Fund Managers and Bankers
 IV. Normative Implications
     A. More on Collective Action with a Heavy Dose of
           Agency Costs
        1. The Coordination Problem: Private Versus Collective
           Interests
        2. The Incentives of the Elite Lawyers
        3. The Sovereigns' Incentives
        4. The Investors' Incentives
        5. The Role of the Public Sector and Industry
           Associations
     B. What Should Courts Do with Contractual Black Holes?
Conclusion
Appendix

INTRODUCTION

A question that courts face whenever they are asked to interpret a standard provision in a commercial contract is how to determine what the parties understood that provision to mean when they contracted. The interpretive goal in contract cases is to recover and then enforce the parties' apparent intentions, as they existed at the time of contracting. This goal implies that courts will attempt to interpret even ambiguous terms in a manner consistent with the ex ante intentions of the contracting parties in so far as a court can recover those intentions from the contract or the surrounding context. …

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