Contract as statute.

AuthorChoi, Stephen J.
PositionBoilerplate: Foundations of Market Contracts Symposium

INTRODUCTION I. Two CASE STUDIES A. The Case of the Pari Passu Clause 1. Patterns in the Data 2. Responsiveness to Shocks 3. The Form that the Market's Response Eventually Took 4. Lessons from the Pari Passu Case B. International Swap and Derivatives Associations C. The Eternity Cases and the Meaning of "Restructuring". II. THE PROBLEM WITH BOILERPLATE A. Traditional Contract Interpretation 1. Textual Analysis 2. Contextual Analysis B. Guessing at Welfare Maximization C. Dealing with Court Errors D. Pricing Response E. Language-Clarification Response III. A THEORY OF BOILERPLATE INTERPRETATION A. The Designated Legislative Body B. Interpretation C. Other Industry-Wide Sources of Authority D. The Disaggregated Contract CONCLUSION INTRODUCTION

The traditional model of contract interpretation focuses on the "meeting of the minds." Parties agree on how to structure their respective obligations and rights and then specify their agreement in a written document. Gaps and ambiguities are inevitable. But where contract language exists for the point in contention and a dispute arises as to the meaning of this language, courts attempt to divine what the parties intended. Among the justifications for deferring to the intent of the parties is the assumption that parties know what is best for themselves. (1) Deference also arguably furthers autonomy values.

Not all contracts and contract terms are individually negotiated. Standard-form or boilerplate contracts are common in the commercial world. Standard-form contracts have received considerable attention from commentators. (2) The focus has been on the problem of power and informational asymmetries among the contracting parties. One party dictates the terms--for example, a big consumer-goods producer may draft a standard-form contract that forms a mandatory part of all consumer purchases.

Boilerplate contracts, however, are found in many markets where the relationship between the parties is not characterized by power imbalances. Instead, we find sophisticated parties on both sides and a multitude of parties with their slight variations on the same set of boilerplate terms. Large portions of the markets for bonds and derivatives are dominated by boilerplate of this type. Our goal is to suggest that the interpretation of boilerplate contracts among sophisticated parties is a topic in need of attention. (3) We contend that general principles of contract interpretation should not apply to this important subset of commercial contracts and make the case that these contracts are better viewed as akin to statutes.

A handful of courts have taken modified interpretive approaches, recognizing the special nature of boilerplate contracts in markets consisting of sophisticated parties. These courts have recognized that uniformity in the interpretation of this language is important because it enables the underlying financial instruments to be priced and traded. Such courts have adhered strictly to the textual language of the contract, (4) displayed a reluctance to imply good faith duties, (5) and applied judge-made analysis of the economic interests of the parties where the contractual language is undeniably ambiguous. (6) Courts have also applied deference to prior court interpretations of the same language (assuming that if the market had had a problem with the prior court interpretation, the market would have corrected the language). (7)

Courts are right in recognizing the need for uniformity in markets that use boilerplate. We part company with them in terms of strategies that will promote uniformity, such as the preference for textualism and the willingness to defer to prior court interpretations. Over time, slight mutations in the precise language that different actors have in their contracts often emerge (8)--mutations which may not have any particular meaning for the contracting parties and that a court taking a textualist approach may attach too great weight. Different boilerplate terms may get cobbled together in the same contract, leading to potential inconsistencies when interpreted through a purely textualist approach. The chance for court error in interpreting boilerplate is therefore high.

Rather than have courts attempt the error-prone process of determining what would be in the parties' best interests, we argue that courts should take a more statutory approach to interpreting boilerplate terms. Specifically, courts should look to the intent of the original drafters of the terms, much like courts look to legislative intent in interpreting statutes. In discerning this intent, the court may need to look to the overall history of a term, the process by which the term became a standard (or one of the standards) in the industry, and its context within the greater commercial environment.

Like the textualists, we argue that courts should not make an inquiry into the actual intent of a specific set of contracting parties (or try to divine the hypothetical bargain that the parties might have wanted to strike). Boilerplate terms, absent guidance from the initial drafters of the terms or other market standard setters, inevitably will become less clear over time. As parties include boilerplate terms drafted years if not decades earlier as a matter of course, looking to the specific intent of any one set of current contracting (and litigating) parties becomes meaningless. The lack of meaning would not be a problem if such terms were merely benign appendices to a contract. However, as in the case of the pari passu clause for sovereign bond agreements we discuss in this Article, boilerplate terms may take on unexpected meanings that radically alter the distribution of rights and duties among contracting parties.

Deference to the intentions of the specific parties before a court is especially inappropriate where there are third party effects. (9) In the contexts on which we focus, an interpretation of the contract language in one case will impact the contracts for a multitude of other parties who all have essentially the same boilerplate language in their contracts. Deferring to the intentions of the parties to the dispute may produce problems where these parties do not represent the interests of the others in the market who have no say in the current litigation. We therefore argue that courts should not attempt to supplement the explicit language of a contract with evidence from the parties' course of dealings or performance as suggested under the Uniform Commercial Code. (10)

Referring to historical meaning and the intent of the original drafters is a form of contextual analysis. Rather than looking at the context of the specific set of contracting parties before the court, though, our approach has courts looking at the context of the original drafters of the term in the case of boilerplate, taking a "statutory" approach to the interpretation of boilerplate terms. Looking to the historical context of a term, we argue, provides the highest probability of divining an interpretation that best maximizes the interests of contracting parties (and thus, approximates what the parties would have wanted to adopt ex ante had they focused on the particular issue at hand). Individually, contracting parties may choose (rationally) not to contract for every contingency and clarify the meaning of every term. For many contractual contingencies, any single set of contracting parties may find it too costly both to identify the exact nature of the contingency and to specify how the contract should deal with the contingency. Where the contingency is commonly faced throughout an industry, the single set of parties ignores the positive external benefit to others from expending resources in drafting and clarifying an applicable contract term. A centralized source for terms, such as an industry association or attorney firm (designated a "standard setter") that originally drafted the terms, in contrast, will have internalized the benefit to the group of adopters of the terms to the extent the standard setter profited from more adoptions when first promulgating the terms. Where the interests of contracting parties today are not too different from those at the time of the initial adoption, looking to the historical record will result in interpretations that better approximate the goals of the industry or trade compared with any single set of contracting parties.

Minimizing error costs in court interpretations is particularly important in the case of boilerplate terms. The market faces large failures in the ability of dispersed participants to modify boilerplate terms effectively over time to take into account changing business conditions and error-prone court interpretations. Dispersed parties may not coordinate to change a term after a court error in interpretation. Faced with the possibility that others may not change a term, a specific set of parties may not wish to deviate from the standard. Deviating, for example, may signal to the market that the parties are particularly litigious and, in the case of fast-paced transactions, delay a deal from going forward.

Compared with courts, the original drafters of boilerplate terms--that is, the original standard setters--enjoy an expertise advantage and internalize the benefit to the range of market participants that will adopt the boilerplate. (11) Also, deferring to historical context and the intent of the original drafters will induce market-based standard setters to coordinate in creating new, clearer terms as well as authoritative definitions and modifications to the existing pool of boilerplate terms. Doing so allows the standard setters developing the new terms to achieve "original drafter" status, thereby obtaining court deference to the standard setters' interpretation for those parties that adopt the new terms.

The Article proceeds as follows. In Part I, we discuss two examples of boilerplate terms drawn from the sovereign bond and...

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