Origin Myths, Contracts, and the Hunt for Pari Passu

Abstract

We use interviews with corporate lawyers and a data set of contracts to explore an elite area of legal practice: sovereign bond lending. Sovereign debt lawyers work at prestigious global law firms, yet the contracts they produce include some terms that defy explanation. Lawyers often account for the existence of these terms through origin myths. Focusing on one contract term, the pari passu clause, we explore two puzzling aspects of these myths. First, we demonstrate that the myths are inaccurate as to both the clause's origin and the role of lawyers in contract drafting. Second, the myths often are unflattering, inaccurately portraying lawyers as engaged in little more than rote copying. We probe this disjuncture between the myths and lawyers' actual practices and explore why contracts origin myths might hold such appeal for this elite segment of the bar.

Market Practice and the Evolution of Foreign Sovereign Immunity

“…The assumption is that each contract is negotiated from scratch. Yet this assumption is incompatible with the experience of practicing lawyers, who typically start with a template and make changes only as necessary to accommodate the present transaction (see, e.g., Weidemaier, Scott, and Gulati ). This reality—in which contracts are “sticky” but do change—brings different questions to the fore.…”

“… In earlier work, we found that over 40 percent of bonds issued before World War II included such revenue “earmarks” (see, e.g., Weidemaier, Scott, and Gulati ).…”

Variation in Boilerplate: Rational Design or Random Mutation?

“…In a fourth formulation, the sovereign bond instrument includes one of the prior three versions with an addendum "except as subject to mandatory law" (termed "Mandatory Law"). Of these, the Rank Equally version of the clause has the oldest vintage (Weidemaier, Scott & Gulati 2013).…”

Evolution or Intelligent Design? The Variation in Pari Passu Clauses

“…We term this traditional version the "Rank Equally" pari passu clause (for details on the history, see Weidemaier, Scott & Gulati 2013 We term this version of the clause that provides for explicit ratable payments, the "Pay Equally" pari passu clause. The Pay Equally clause poses a high risk of holdouts: this was the meaning of pari passu the holdouts were arguing for in the Argentine and Peru litigations (where the clauses were not explicitly of the Pay Equally variety).…”

“…8 7 A natural question to ask here is why this variation took so long to appear (if one starts the pari passu evolution clock in the mid to late 1800s). One answer to this question comes out of the data on how the clause evolved that is reported in Weidemaier, Scott & Gulati (2013). What they report is that the pari passu clause, while widely used in the 1800s and early 1900s, was not ubiquitous -and probably had some meaning (particularly in the context of gunboat diplomacy).…”