Evolution or Intelligent Design? The Variation in Pari Passu Clauses

Abstract

Standard contract doctrine presumes that sophisticated parties choose their terminology carefully because they want courts or counterparts to understand what they intended. The implication of this "Intelligent Design" model of behavior is that courts should pay careful attention to the precise phrasing of contracts. Using a study of the sovereign bond market, we examine the Intelligent Design model as applied to standard-form contracting. In NML v. Argentina, federal courts in New York attached importance to the precise phrasing of the boilerplate contracts at issue. The decision was promptly condemned in the industry for its supposedly erroneous mode of contract interpretation. Utilizing data on how industry contracting practices responded to the decision, we ask whether the market response indicates that parties in fact intended for the small variations in their contract language to embody a particular meaning. We find the data supports a model closer to random evolution rather than intelligent design.