Abstract:
Standard contract doctrine treats commercial contract terms as embodying a bargain between sophisticated contracting parties. In particular, contract law presumes that these parties choose their terminology carefully because they want courts or counterparts to understand the rights and responsibilities that form the basis for mutually beneficial trade. The implication of this ‘Intelligent Design’ model of contracting behavior is that, other things equal, courts should give the precise language of contracts a meaning that reflects the ex ante intentions of the parties. Thus, for example, using the term ‘best efforts’ rather than ‘reasonable efforts’ presumably requires a different, higher level of ‘effort’. Using a study of one of the most sophisticated financial markets – the markets for sovereign bonds – we examine the validity of the Intelligent Design model as applied to standard form boilerplate contracting. In the leading sovereign debt contracting case of the past half century, NML Capital v Republic of Argentina, federal courts in New York followed the standard paradigm and attached great importance to the precise choice of words of the boilerplate contracts at issue. Utilizing data on how the market responded to this decision, we ask whether the market response to the NML Capital decisions indicates that parties intended for the small variations in their contract language to embody a particular meaning or whether the data suggest that the boilerplate language evolved mindlessly through random variations repeated by rote over long periods of time. Contrary to the standard paradigm and conventional academic wisdom, we find the data points overwhelmingly toward random evolution rather than intelligent design.
Choi, Stephen J and Gulati, G Mitu and Scott, Robert E, Evolution or Intelligent Design? The Variation in Pari Passu Clauses (August 19, 2016).
First posted 2016-08-25 06:26:50
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