Friday, June 3, 2005
One of the things about boilerplate is its reliability. And its ubiquity. Okay, that's two things. But using the same term all the time has enormous advantages because everybody knows what it means. But what happens when some court decides that the universal term actually means something different? The repercussions go far beyond the particular case before the court.
That's the problem that Craig Hoffman (Georgetown) is tackling in a paper he's giving today at the Law & Society Conference in Las Vegas. His Interpreting Boilerplate: Parsing pari passu Clauses in Sovereign Debt Contracts is slated for this morning at 10:15, Vegas time. Click on the "continue reading" link for the abstract.
The following sentence, called a pari passu clause, appears in every bond contract under which countries today issue debt: "The obligations of the Guarantor hereunder do rank and will rank at least pari passu in priority with all other External Indebtedness of the Guarantor, and interest thereon." This clause is an example of boilerplate language. Provisions such as these migrate from contract to contract with little thought by the parties who are bound by them. As long as no one reads them, and nothing bad happens, these clauses remain unchanged in contracts for decades -- and, in some cases, even longer. Recently, the pari passu clause has become the focus of very contentious and expensive litigation. A Belgian court has recently interpreted this pari passu clause in a way that no one had imagined before. Interpreting the parties' rights under a Peruvian debt contract, which was governed by New York law, the Belgian court read the clause to require that the bondholders must be paid pro rata with other debt of the issuer. This shift from priority of ranking to pro rata payment has sent shock waves throughout the sovereign debt world. The boilerplate language of the clause is not merely unclear; it is opaque. In this paper, I examine the pari passu clause and propose an analysis that comports with both the syntax of the sentence and the contractual expectations of the parties.