Gregory H. Shill
University of Denver Sturm College of Law; Harvard Law School
April 13, 2014
89 Tulane Law Review __ (2015, Forthcoming)
U Denver Legal Studies Research Paper No. 14-16
Scholars generally assess the usefulness of commercial boilerplate contracts from the standpoint of the firms that use them. Thus, whether such contracts are celebrated or attacked, efforts to analyze them focus on their impact on the contracting parties themselves. Yet these firm-centric accounts overlook the cumulative impact of standardization on a given market. Where the market in question is critical to the financial system, this oversight can be quite consequential.
This article examines the coordinated use of two standard contract terms in European sovereign bonds, a market that many observers considered the greatest source of global economic instability in the five years following the 2007-09 financial crisis, because of the risk that a country might leave the euro. These terms are foreign governing law clauses (which often require parties to resolve any dispute under the law of New York or England) and clauses stipulating payment in euro. This article scrutinizes the existing scholarly consensus about how these terms would operate if a country were to leave the euro and try to redenominate its debts into a new currency, and finds it dangerously inaccurate. This failure has troubling implications not only for the multitrillion-dollar sovereign lending market, but for the future of securities contracts and financial regulation more generally.
Specifically, flawed assumptions about the boilerplate terms that govern these debts reveal a perilous gap in financial regulation: the potential for standard terms in private contracts, when they become ubiquitous in a major securities market, to inflict severe and unexpected harm on the broader financial system. Currently, the law lacks even a vocabulary to describe this dangerous externality, let alone a mechanism to manage it. The article terms it the risk of “boilerplate shock.” To reduce the risk of boilerplate shock in the Eurozone, the article proposes a new rule that would allow a sovereign bond to be repaid in the issuer’s new currency under certain circumstances.
But the broader danger the article reveals — the potential for private contracts to serve as incubators of systemic risk — is in urgent need of further study. The consensus narrative of excessive Wall Street risk-taking fixates on banking practices, casting lawyers in a supporting (and usually benign) role. Given their potential to inadvertently facilitate “bank runs” and other serious economic disruptions, this article supplements the dominant account by arguing for the elevation of lawyer work product like contracts — as well as lawyers and law firms themselves — in academic and policy discussions about systemic risk.
Number of Pages in PDF File: 77
Keywords: sovereign debt, financial regulation, systemic risk, securities regulation, monetary law, commercial law, contract design, boilerplate, bond, conflict of laws, eurozone, private international law, sovereign default, euro, European Union, EMU, lex monetae, ISDA, derivative, law of money, currency
JEL Classification: K00, K22, K23, K33, K41, E42, E44, E52, E58, E62, F02, F33, F34, F42Accepted Paper Series
Date posted: March 3, 2014 ; Last revised: July 16, 2014
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