COLUMBIA LAW SCHOOL FALL 2012 TUESDAY FACULTY WORKSHOP SERIES Tuesday, December 4, 2012 Robert Scott & Mitu Gulati Present “THE THREE AND A HALF MINUTE TRANSACTION: BOILERPLATE AND THE LIMITS OF CONTRACT DESIGN” Case Lounge, Jerome Greene Hall Catered Lunch to begin at 12:00 p.m. Presentation to begin at 12:15 p.m. Discussion to follow until 1:10 p.m.; informal conversation until 1:30 p.m. Electronic copies of the papers are available online at http://www.law.columbia.edu/faculty/fac_resources/faculty_lunch/fall12 Please contact Char Smullyan for special dietary requests: ext.4-3259, [email protected] For extra copies or other questions, please contact Rachel Jones: 4-7594, [email protected] Date Presenter Paper September 4 Michael Gerrard Expedited Approval of Energy Projects: Assessing the Forms of Procedural Relief 11 Carol Sanger Father and Fetuses: What Would Men Do? 18 Charles Fried The Ambitions of Contract as Promise Thirty Years On 25 Franz Mayer The Law and the Euro Crisis October 2 Legal Theory Workshop TBA 9 Curtis Milhaupt “We are Happy": A Glimpse of North Korea under Kim III 16 Daniel Bethlehem Principles Relevant to the Scope of a State's Right of Self - Defense Against an Imminent or Actual Armed Attack by Nonstate Actors 23 Sudhir Krishnaswamy Implementing the Constitution: Directive Principles as Underenforced Norms 30 Hanoch Dagan Private Law Pluralism and the Rule of Law November 6 Academic/ Curriculum N/A Lunch 13 Scott Hemphill and Tim Parallel Exclusion Wu (Thursday Workshop) 20 Fred Schauer Legal Realism Untamed 27 Legal Theory Workshop - TBA Theodore Ruger December 4 Panel Celebrating THE THREE AND A HALF MINUTE TRANSACTION : Robert Scott & Mitu BOILERPLATE AND THE LIMITS OF CONTRACT DESIGN Gulati's new book THE THREE AND A HALF MINUTE TRANSACTION: BOILERPLATE AND THE LIMITS OF CONTRACT DESIGN Mitu Gulati & Robert E. Scott Abstract Theory tells us that the lawyers who draft standard-form contracts will respond to an erroneous court interpretation of a boilerplate contract term by revising the standard formulation of the clause or otherwise clarifying the ambiguity. Lawyers, it is assumed, have the incentive to protect clients from the risk that other courts may adopt the disfavored interpretation or that the apparent ambiguity will, in any event, produce future costly litigation. Reality is often different. Boilerplate terms in standard contracts are often sticky. Many of the theories explaining why standard contract terms are resistant to innovation focus on the efficiency benefits of market-wide standardization. Others look to economic or psychological factors that deter the production of innovative terms. In this book, we use both qualitative and quantitative data to explore the reasons for the phenomenon of stickiness in sovereign bond contracts. We focus on a novel judicial interpretation of an obscure clause in cross-border financial contracts--the pari passu clause—that rattled the chandeliers of international finance. One might have expected the practicing bar to quickly clarify their forms before the heresy could spread and gain traction. But that didn’t happen. In over 90% of the contracts subsequently issued, no attempt was made to clarify the imprecise language of the clause. None of the extant theories of stickiness explain what we find. Rather, the story that emerges is about the modern big law firm: the financial pressure on big firms to maintain a high volume of transactions contributes to an array of conflicts that that deter innovation and are largely hidden from the individual lawyers charged with drafting responsibility—conflicts that are hidden in part by the myths that the members of this legal community collectively tell themselves about the origins of boilerplate terms whose meaning has been lost in time. Draft – January 6, 2012 Contents TABLE OF FIGURES .............................................................................. ERROR ! BOOKMARK NOT DEFINED . INTRODUCTION ............................................................................................................................................ 5 CHAPTER I: A STORY OF STICKY BOILERPLATE BEGINS IN BRUSSELS ................................................ 13 Elliott v. Peru : Brussels, September 26, 2000 ......................................................................................... 16 CHAPTER II: THE SOVEREIGN BOND CONTRACT ................................................................................... 23 The Sovereign Debt Contracting Problem .............................................................................................. 23 Two Different Perspectives on the Problem ........................................................................................... 26 The Provisions of the Contract ............................................................................................................... 28 Negotiating Over the Contract Terms ..................................................................................................... 32 Optimal Changes to Pari Passu after Elliott .......................................................................................... 34 CHAPTER III: THEORIES EXPLAINING THE STICKINESS OF CONTRACT BOILERPLATE ............ ERROR ! BOOKMARK NOT DEFINED . Learning Externalities ............................................................................... Error! Bookmark not defined. Network Externalities ................................................................................. Error! Bookmark not defined. Negative Signaling ..................................................................................... Error! Bookmark not defined. A Penalty for Remedial Measures .............................................................. Error! Bookmark not defined. Contract Routines ...................................................................................... Error! Bookmark not defined. Nervous Nellies and Herd Behavior .......................................................... Error! Bookmark not defined. Free Riders ................................................................................................. Error! Bookmark not defined. Endowment Effects (and Related Cognitive Biases) .................................. Error! Bookmark not defined. One Can’t Fix What One Doesn’t Understand .......................................... Error! Bookmark not defined. Stickiness as Myth ...................................................................................... Error! Bookmark not defined. CHAPTER IV: THE IMPORTANCE OF ELLIOTT : THE OFFICIAL STORY ........... ERROR ! BOOKMARK NOT DEFINED . The New Litigation Risk ............................................................................. Error! Bookmark not defined. CHAPTER V: MARKET RESPONSES ................................................... ERROR ! BOOKMARK NOT DEFINED . The Sovereign Market ................................................................................ Error! Bookmark not defined. The Issuers ................................................................................................. Error! Bookmark not defined. The Lawyers ............................................................................................... Error! Bookmark not defined. The Bankers ............................................................................................... Error! Bookmark not defined. CHAPTER VI: THE FAITHFUL LAWYER ............................................ ERROR ! BOOKMARK NOT DEFINED . Learning Externalities and Free Riders ..................................................... Error! Bookmark not defined. Network Externalities: Vertical not Horizontal ........................................ Error! Bookmark not defined. Negative Signals: Empirical Realities and Shoulder Shrugs ..................... Error! Bookmark not defined. Hindsight Bias: Bemusement and Annoyance .......................................... Error! Bookmark not defined. CHAPTER VII: THE IMPERFECT AGENT ........................................... ERROR ! BOOKMARK NOT DEFINED . Mechanization, Commoditization, and the Golden Age of Lawyering ...... Error! Bookmark not defined. Anti Innovation Bias and Herd Behavior ................................................... Error! Bookmark not defined. The Barriers Caused by Legal Uncertainty (Can you revise a clause if you don’t know what it means?) ................................................................................................................... Error! Bookmark not defined. Big Brother Will Fix the Problem .............................................................. Error! Bookmark not defined. Contract Terms as as Symbols (Herein of the Endowment Effect) ............ Error! Bookmark not defined. Stickiness is a Myth (And, in any event, the problem was solved by DOJ briefs in 2004) ................ Error! Bookmark not defined. CHAPTER VIII: RITUALS AND MYTHS .............................................. ERROR ! BOOKMARK NOT DEFINED . Finding Meaning in Stories ....................................................................... Error! Bookmark not defined. Tales of Pari Passu .................................................................................... Error! Bookmark not defined. The First Story: Pari Passu as Anti-Earmarking Device ........................... Error! Bookmark not defined. The Second Story: It was Copied from Corporate Deals . Inadvertently ............. Error! Bookmark