Innovation in Boilerplate Contracts: An Empirical Examination of Sovereign Bonds

82 Pages Posted: 10 Mar 2004

See all articles by Stephen J. Choi

Stephen J. Choi

New York University School of Law

G. Mitu Gulati

Duke University School of Law

Abstract

Network externalities may lead contracting parties to stay with a standardized term despite preferences for another term. Using a dataset of sovereign bond offerings from 1995 to early 2004, we test the importance of standardization for the modification provisions relating to payment terms. We provide evidence that (a) standardization may lead parties to adopt provisions not necessarily out of preference and (b) standards, nonetheless, may change. The process of change, however, is not necessarily quick or straightforward. In the sovereign bond context, change came by way of an interpretive shock. Contracts with modification provisions requiring the unanimous consent of bondholders (UACs) suddenly became vulnerable to change with less than unanimous approval through the unexpected use of exit consents. After the shock, sovereigns and investors did not initially react with a significant shift in contract terms. However, we provide evidence that after this initial lull (once investors and sovereign gained experience on the value of allowing modification of payment terms with less than unanimous consent), large shifts in contract terms followed, moving sovereign bond contracts even further away from UACs toward collective action clauses (CACs). We also report evidence that issuer's attorneys dealing with a high volume of sovereign offerings were the driving factor behind this delayed large shift in contract terms.

Suggested Citation

Choi, Stephen J. and Gulati, Gaurang Mitu, Innovation in Boilerplate Contracts: An Empirical Examination of Sovereign Bonds. Emory Law Journal, 2004. Available at SSRN: https://ssrn.com/abstract=515542

Stephen J. Choi

New York University School of Law ( email )

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

Gaurang Mitu Gulati (Contact Author)

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States

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