Contractual Howlers: A Russian Bond Case Study

Abstract

Both theorists and courts commonly assume that high-dollar financial contracts between sophisticated parties are free of linguistic errors: sophisticated parties, the thinking goes, will carefully express their shared intentions and eliminate any troublesome gaps and glitches.

Consistent with this assumption, most courts interpret the language of commercial contracts literally according to the plain or ordinary meaning of the words in the agreement. An examination of contracts governing Russian bonds outstanding in 2022, however, reveals a large number of troublesome contractual gaps and glitches. We refer to these linguistic irregularities as “howlers” to highlight the significant litigation risks they create. In this paper we use interviews with market participants to assess the causes of the contractual howlers we observe in the Russian bonds. The presence of howlers undermines the core assumption that justifies the literal interpretive approach used by courts for contracts between sophisticated parties.

Keywords: sovereign bonds, contracts, howlers, landmines, Russia

JEL Classification: K12, K22, H63, H81