Three and a Half Minute Transaction : Boilerplate and the Limits of Contract Design

Boilerplate language in contracts tends to stick around long after its origins and purpose have been forgotten. Usually there are no serious repercussions, but sometimes it can cause unexpected problems. Such was the case with the obscure pari passu clause in cross-border sovereign debt contracts, until a novel judicial interpretation rattled international finance by forcing a defaulting sovereign—for one of the first times in the market’s centuries-long history—to repay its foreign creditors. Though neither party wanted this outcome, the vast majority of contracts subsequently issued demonstrate virtually no attempt to clarify the imprecise language of the clause.

Mitu Gulati is faculty at the University of Virginia School of Law.

Robert E. Scott is the Alfred McCormack Professor of Law and the director of the Center for Contract and Economic Organization at Columbia Law School.