Contractual Landmines

75 Pages Posted: 5 Aug 2022

See all articles by Robert E. Scott

Robert E. Scott

Columbia University - Law School

Stephen J. Choi

New York University School of Law

Mitu Gulati

University of Virginia School of Law

Date Written: August 1, 2022

Abstract

The conventional view is that standardized boilerplate terms represent an optimal contractual solution to the contracting problems facing parties in large markets. As Clifford Smith and Jerold Warner famously explained, “harmful heuristics, like harmful mutations, will die out.” But an examination of a sample of current sovereign bond contracts reveals, to the contrary, numerous instances of harmful landmines--vague and apparently purposeful changes to standard language that increases a creditor’s nonpayment risk, coupled with blatant errors in expression and drafting and a continuing use of inapt terms that were historically imported from corporate transactions. Moreover, these landmines differ from each other in important respects: purposeful changes to the standard form reflect careful lawyering on behalf of sovereign clients, while errors that only benefit subsequent activists reflect haste in adapting precedents to new transactions.

Using a unique data set together with interviews from leading practitioners, we find that the conventional view fails to recognize the unique role that lawyers, both experienced lawyers and novices, play in the drafting of standard form contracts. Experienced lawyers, the “gurus,” play an outsized role in the drafting of the debt contracts used in large liquid markets such as sovereign debt. In negotiating with the underwriters who place these instruments on the market, gurus are able to insert vague language that softens the strict payment obligations found in the standardized terms. These changes to the standard form are “subversive” in the sense that they offer strategic advantage to the sovereign in subsequent restructuring negotiations. Novice lawyers, on the other hand are reluctant to negotiate important changes in the standard from but their haste in executing the contract can lead to harmful errors. We find that subversive landmines are common in contemporary sovereign debt contracts and are more prevalent than the errors that occur when inexperienced lawyers attempt to make changes in the standard terms.

Keywords: Landmines, Boilerplate, Contract, Sovereign Debt

JEL Classification: K12

Suggested Citation

Scott, Robert E. and Choi, Stephen J. and Gulati, Mitu, Contractual Landmines (August 1, 2022). Available at SSRN: https://ssrn.com/abstract=4178649 or http://dx.doi.org/10.2139/ssrn.4178649

Robert E. Scott

Columbia University - Law School ( email )

435 West 116th Street
New York, NY 10025
United States
212-854-0072 (Phone)

Stephen J. Choi

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States

Mitu Gulati (Contact Author)

University of Virginia School of Law ( email )

580 Massie Road
Charlottesville, VA 22903
United States

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