Variation in Boilerplate: Rational Design or Random Mutation?

Abstract

Standard contract doctrine presumes that sophisticated contracting parties choose their terminology carefully because they want courts or counterparts to understand the precise meaning they intend to convey. The implication of this “rational design” model of commercial contracting behavior is that courts should pay close attention to the plain or ordinary meaning of the language in a standardized term and interpret observed changes in terminology as embodying new meaning that varies from the original formulation. Using a study of the sovereign bond market, we examine the rational design model as applied to standard-form contracting. In NML v. Argentina, federal courts in New York attached great weight to the precise phrasing of the boilerplate contract terms at issue. The industry promptly condemned the decision for endorsing a supposedly erroneous interpretation of a variant of a hoary boilerplate clause. Utilizing data on how contracting practices responded to the courts’ decisions, we ask whether the market response indicates that parties in fact intended the variations in their standard contract language to embody different meanings. The data support a model of evolution of boilerplate language that is closer to random mutation rather than rational design.