Disputing Boilerplate

Abstract:     
Sovereign bond contracts are thought to consist mostly of boilerplate. That is, except for a handful of custom terms, the contracts are assumed to adopt standard terms that are functionally if not literally identical to those used in other bond contracts. This characterization has important theoretical implications, for standardized terms may be "sticky." The implication is that market participants may select widely-used terms over terms that would be optimal on their own merits.

This article explores the phenomenon of standardization in the context of a particular contracting choice: whether to include an arbitration clause in a sovereign bond contract. Most observers take for granted that sovereign bonds adopt boilerplate dispute resolution provisions calling for litigation in foreign courts, typically in New York or in England, even though some parties (by hypothesis) would prefer arbitration. The usual explanation for this discrepancy invokes the inherent "stickiness" of standard terms. This article contests this explanation, demonstrating as an empirical matter that sovereign bond contracts in fact adopt varied dispute resolution terms and arguing that a general preference for litigation, rather than default rule stickiness, best explains the relatively infrequent use of arbitration. In the process, the article raises broader implications for sovereign debt research and for research into contract innovation and change.

Number of Pages in PDF File: 65

working papers series