The Evolution of Boilerplate Contracts: Evidence from the Sovereign Debt Market
Stephen J. Choi
New York University School of Law
G. Mitu Gulati
Duke University School of Law
NYU, Law and Economics Research Paper No. 05-17; Georgetown Law and Economics Research Paper No. 800264
Scholarship on the subject of innovation in financial products is sparse. And research on innovation by lawyers writing financial contracts, particularly the boilerplate contracts that dominate many markets, is sparser still. The central theoretical debate in the literature on boilerplate contracts is over whether contract language responds immediately and effectively to external changes or whether nonlinearities in the form of network effects prevent these efficient transitions. Depending on the view one takes, there is a different role for official sector involvement. This debate over the responsiveness of contract language has taken center stage in recent discussions in the sovereign debt area. Recent occurrences in the world of sovereign debt contracts provide a ripe data set for the examination of the contract responsiveness question. Prior to 2000, all the N.Y. issued sovereign bond contracts were viewed as functionally identical in terms of being restructuring proof. Then, in 2000, Ecuador used an ambiguity in the contract language to argue that its contracts are indeed susceptible to restructuring. After Ecuador's successful restructuring, contracts that earlier looked to be homogenous, now differed in significant ways. Small differences in contract language that were previously viewed as unimportant, after Ecuador's restructuring, impacted the ease with which the Ecuador style restructuring technique can be used. So, all of a sudden, Argentina might find itself with contracts that are hard to restructure and Belize might have contracts that are easy to restructure. In February 2003, following the lead of Mexico, the contracts in this market begin to move to a new (and, once again, relatively homogenous) restructuring friendly standard. Our article examines what happened in between 1996 and 2004, with respect to the heterogeneity that the Ecuador shock in 2000 created. Did the sovereign issuers converge to a single new intermediate standard? Or did they move back to the old restructuring proof standard? Or did they do nothing? The answers to these questions shed light on the above mentioned debate over the ability of markets for boilerplate contracts to effectively respond to changes in their environment.
Number of Pages in PDF File: 63
Keywords: boilerplate terms, contract theory, sovereign debt
JEL Classification: K13, K23, K34
Date posted: September 8, 2005
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