The Black Hole Problem in Commercial Boilerplate

by Stephen J. Choi, Mitu Gulati & Robert E. Scott

Click here for a PDF file of this article

Abstract

Rote use of a standard-form contract term can erode its meaning, a phenomenon made worse when the process of encrustation introduces various formulations of the term. When they occur, rote usage and encrustation weaken the communicative properties of boilerplate terms, leading some terms to lose much, if not all, meaning. In theory, if a clause is emptied of meaning, it can create a contractual black hole in which, as the term loses meaning, random variations in language appear and persist. What, then, are the consequences if parties exploit these variations in language by successfully advancing an interpretation the market disavows? Traditional doctrine holds that even if the court errs in the meaning it gives to a clause, parties have an incentive promptly 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 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 series of court decisions in New York arguably misinterpreting a particular variation of the clause. Even though the courts’ interpretation put at risk a multitrillion dollar debt market, meaningful revisions to the language of the boilerplate term did not begin to appear until late 2014. In the interim, trillions of dollars in bonds were issued with an uncorrected version of the term. Market forces, in other words, worked slowly to remedy a systemic problem that caused substantial costs. We ask whether the state could do more to avoid the problem at the front end rather than depend on market forces to correct court error at the back end.

The Black Hole Problem in Commercial Boilerplate

by Stephen J. Choi, Mitu Gulati & Robert E. Scott

Click here for a PDF file of this article

Abstract

Rote use of a standard-form contract term can erode its meaning, a phenomenon made worse when the process of encrustation introduces various formulations of the term. When they occur, rote usage and encrustation weaken the communicative properties of boilerplate terms, leading some terms to lose much, if not all, meaning. In theory, if a clause is emptied of meaning, it can create a contractual black hole in which, as the term loses meaning, random variations in language appear and persist. What, then, are the consequences if parties exploit these variations in language by successfully advancing an interpretation the market disavows? Traditional doctrine holds that even if the court errs in the meaning it gives to a clause, parties have an incentive promptly 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 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 series of court decisions in New York arguably misinterpreting a particular variation of the clause. Even though the courts’ interpretation put at risk a multitrillion dollar debt market, meaningful revisions to the language of the boilerplate term did not begin to appear until late 2014. In the interim, trillions of dollars in bonds were issued with an uncorrected version of the term. Market forces, in other words, worked slowly to remedy a systemic problem that caused substantial costs. We ask whether the state could do more to avoid the problem at the front end rather than depend on market forces to correct court error at the back end.