Sovereign Debt Documentation: Unraveling the Pari Passu Mystery
DePaul Business & Commercial Law Journal, Vol. 7, No. 1, p. 119, Fall 2008
Posted: 15 May 2008 Last revised: 31 May 2010
Restructuring of sovereign debt faces conflicts between participating creditors who negotiate a settlement with a sovereign debtor in distress and holdout creditors who aggressively pursue a litigation strategy to recover all amounts due. Such conflicts have been exacerbated by the ruling of a Belgian court in the Elliott Case that empowers the use of the standard pari passu clause by holdout creditors to prevent payments being made selectively to participating creditors. Although debt market players denounced the rationality of the court's interpretation, there was no change to the pari passu clause in sovereign debt contracts.
This Article builds upon the theories of boilerplate terms in standard contracts and upon existing empirical evidence to seek various endogenous and exogenous reasons as to why the pari passu clause may not have altered despite its value-reducing nature. While there may be endogenous reasons surrounding a specific clause which result in the constancy of such clause following interpretive shocks, there may be other exogenous reasons too that affect the bargaining power and dynamics between contracting parties causing boilerplate terms to continue unabated though they may be ambiguous in nature due to interpretation handed down by courts. This Article advocates for a review and monitoring of both endogenous as well as exogenous factors that play upon any boilerplate term or its interpretation. Such monitoring would assist the market in determining whether boilerplate terms should be left untouched (thereby continuing with the comfort of the market with such term undisturbed) or whether such terms should be altered as a result of interpretive events so as to remove ambiguities or to enhance the value of those terms to the parties to such contract as well as to market players in general.
Keywords: sovereign debt, pari passu, boilerplate contracts
JEL Classification: K12
Suggested Citation: Suggested Citation