Loading...
Contractual Landmines
Scott, Robert E. Choi, Stephen J. Gulati, Mitu
Scott, Robert E.
Choi, Stephen J.
Gulati, Mitu
Abstract
Conventional wisdom is that the standardized boilerplate terms used in
large commercial markets survive unchanged because they are an optimal
solution to the contracting problems facing parties in these markets. As
Smith and Warner explained, “harmful heuristics, like harmful mutations,
will die out.” But an examination of a sample of current sovereign bond
contracts reveals numerous instances of harmful landmines—some are deliberate
changes to standard language that increase a creditor’s nonpayment
risk, others are blatant drafting errors, and yet others are inapt terms that
have been carelessly imported from corporate transactions. Moreover, these
landmines differ from each other in important respects: deliberate changes
to the standard form reflect strategic lawyering on behalf of sovereign clients,
while errors that only benefit subsequent activists reflect haste in adapting
precedents to new transactions. Using both quantitative data and interviews
with market participants, we find that the conventional view fails to recognize
the unique and distorting role that lawyers play in the drafting of standard
form contracts. Systematic asymmetries in the market for the lawyers
who negotiate and draft these contracts explain why real-world contracts depart
from the efficient contract paradigm.