Origin Myths, Contracts, and the Hunt for Pari Passu

Abstract

Sovereign loans involve complex but largely standardized contracts, and these include some terms that no one understands. Lawyers often account for the existence of these terms through origin myths. Focusing on one contract term, the pari passu clause, this article explores two puzzling aspects of these myths. First, it demonstrates 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. The article probes this disjunction between the myths and lawyers' actual practices and explores why contracts origin myths might hold such appeal for this elite segment of the bar.

Pseudo-Contract & Shared Meaning Analysis

“…148 For example, "[i]nstead of blind copying, [sovereign debt lawyers] appear to engage in frequent contract tailoring," and "instead of overlooking mistaken additions to contract boilerplate, they demonstrate a thorough understanding of the language used in their contracts." 149 Unlike in the simpler cases described so far, the conceptual test of shared meaning analysis suggests that all of the boilerplate text found in sovereign bond instruments created in this fashion could have been exchanged in a more complex, oral, face-to-face discussion among these expert corporate lawyers -acting as agents for the primary partiesto produce an actual agreement with shared meaning. So long as indirect investors are equally sophisticated, as many typically are, sovereign bonds should be able to create shared meanings that are widely understood in social context by participants in sovereign bond markets.…”

“…142 appear to contradict a more transactional ideal of contracting, under which sophisticated parties use fresh language to reach fully bespoke agreements over all text and terms in every case. 146 But the view that these parties are engaging in blind copying is not entirely accurate either. To test it, Professors Mark Weidemaier, Robert E. Scott, and Mitu Gulati collected extensive data on sovereign bond instruments going back to the nineteenth century.…”

“…Consider the wellstudied example of pari passu clauses. These clauses appear in many contemporary sovereign bonds, 151 just as in many other debt instruments, and typically say something like this:…”

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 2013). This reality—in which contracts are “sticky” but do change—brings different questions to the fore.…”

6. Count the Limbs: Designing Robust Aggregation Clauses in Sovereign Bonds

“…In New York and London, the list of terms requiring supermajority consent for amendment grew longer to limit the scope for exit consents, which came to look coercive in the eyes of market participants after a string of bond exchanges. On the other hand, many issuers added terms that made it harder for individual creditors to accelerate and enforce their bonds (Bradley andGulati 2012, Weidemaier andGulati 2014). Concerns about conflicts of interest, such as sovereign debtors and entities controlled by them voting the bonds, 7 led to the introduction of disenfranchisement clauses, which deemed bonds owned or controlled by the debtor not to be "outstanding" for voting purposes.…”