Abstract:
Rote use of a standard form contract term can erode its meaning, a phenomenon made worse when the rote gets encrusted with various forms of legal jargon. The foregoing process, when it occurs, weakens the communicative properties of boilerplate terms, leading some terms to lose meaning completely resulting in a ‘contractual black hole’. The question that follows is what interpretive strategy courts should use to give meaning to boilerplate that has effectively become a contractual black hole. Traditional doctrine holds that a textual analysis of the language by the court should suffice; even if the court errs, parties have an incentive to revise the standard language to exclude the aberrant interpretation. But what if the assumptions about the costs and motivations to revise this type of boilerplate are wrong? We seek to gain purchase on this question with a study of the pari passu clause, a standard provision in sovereign debt contracts that almost no one seems to understand. This clause gained fame in 2011 because of a vilified series of court decisions in New York arguably misinterpreting the clause. However, even though the courts endorsed an interpretation that undermined efforts by sovereigns to restructure their bonds and put at risk a multi-trillion dollar debt market, meaningful change in the language of the boilerplate term did not even begin to appear until late 2014. Market forces, in other words, worked very slowly to remedy a major systemic problem, leading to considerable costs. We ask, therefore, whether courts might not do more to avoid the problem at the front end rather than depend on market forces to correct court error at the back end.
Choi, Stephen J and Gulati, G Mitu and Scott, Robert E, The Costs of Contractual Black Holes (September 6, 2016).
First posted 2016-09-09 06:30:21
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