Conventional wisdom is that the standardized boilerplate terms used in large commercial markets survive unchanged because they are an optimal solution to the contracting problems facing parties in these markets. As Smith and Warner explained, “harmful heuristics, like harmful mutations, will die out.” But an examination of a sample of current sovereign bond contracts reveals numerous instances of harmful landmines—some are deliberate changes to standard language that increase a creditor’s nonpayment risk, others are blatant drafting errors, and yet others are inapt terms that have been carelessly imported from corporate transactions. Moreover, these landmines differ from each other in important respects: deliberate changes to the standard form reflect strategic lawyering on behalf of sovereign clients, while errors that only benefit subsequent activists reflect haste in adapting precedents to new transactions. Using both quantitative data and interviews with market participants, we find that the conventional view fails to recognize the unique and distorting role that lawyers play in the drafting of standard form contracts. Systematic asymmetries in the market for the lawyers who negotiate and draft these contracts explain why real-world contracts depart from the efficient contract paradigm.
Replication code and data for this paper is available on JREG’s Dataverse account.