Contracts

Gold, Goldberg, Kelly, Sherwin & Smith – The Oxford Handbook of the New Private Law

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Post by Andrew Gold, John Goldberg, Daniel Kelly, Emily Sherwin, and Henry Smith We have some good news – The Oxford Handbook of the New Private Law has just been published (Oxford; Amazon)!  The Handbook offers exciting developments in scholarship dedicated to the study of private law in general, and to the New Private Law … Read more

Gold – The Right of Redress

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Post by Andrew Gold I’m writing to put in a quick word about my new book, The Right of Redress – now published in the Oxford Legal Philosophy Series. (Here is a poster for the book, which includes a discount code.) Corrective justice theories of private law often focus on a wrongdoer’s obligation to fix … Read more

Oxford Studies in Private Law Theory (Miller & Oberdiek eds.) — Call for Papers

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Oxford University Press is pleased to announce the launch of Oxford Studies in Private Law Theory, edited by Paul Miller (Notre Dame) and John Oberdiek (Rutgers), and to issue a call for papers for the first volume.  Oxford Studies in Private Law Theory is a series of biennial volumes showcasing the best article-length work across private law … Read more

HLS Private Law Workshop; Lisa Bernstein, Revisiting the Maghribi Traders (Again)

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Post by Patrick Goold

Avner Greif’s study of Maghribi Jewish traders in the eleventh century is a seminal work in the literature on private ordering. In a couple of highly influential articles (here and here), Greif documented how this group of merchants created elaborate trading networks across the Islamic Mediterranean. Greif argued that the Maghribi formed a close-knit “coalition” that could eschew enforcement of agreements by lawsuits and the threat of liability and instead rely on reputation-based community enforcement. However, in recent years, historians of the period, including  Jessica Goldberg, as well as Jeremy Edwards and Sheilagh Ogilvie, have questioned Greif’s thesis, suggesting that there is little evidence of Maghribi traders boycotting members for misconduct, and some evidence that they relied on courts.

At this week’s HLS Private Law Workshop, Lisa Bernstein presented a draft essay that revisits this topic (Revisiting the Maghribi Traders (Again): A Social Network and Relational Contracting Perspective). Bernstein proposes to revise Greif’s analysis by swapping out the notion of “coalition” on which he relied for social network analysis and relational contract theory. While this is an alternative account of the Maghribi activities, it nonetheless supports Greif’s central thesis.

Although Maghribi merchants sometimes formed partnerships with one another, they more commonly used each other as reciprocal agents under a legally unenforceable agreement known as a Suhba. Under a Suhba, a merchant who asked his agent to perform a task (for example, travel to a foreign city to sell the merchant’s flax) would become obligated to perform a task of equal value (for example, introduce the agent to other important merchants). This system enabled the traders to diversify their trading portfolios and reach many markets across the Mediterranean without needing to travel with their goods. The center of this trading activity was Fustat, today part of Old Cairo, and it is a cache of documents in the Cairo Geniza that serve as the main historical record of the merchants’ activities.

Bernstein argues that the Maghribi traders were organized as a “semi-closed bridge and cluster network with small-world properties.” Within trading centers (cities like Fustat), most trade was conducted in the open with witnesses. Meanwhile, business and social interactions resulted in a dense network of ties that enabled reputation information to spread easily. These “network clusters” were then “bridged” by a number of social institutions and organizations. Postal routes between trading centers enabled information about reputation to flow between clusters. A handful of dominant traders also had personal and family ties spreading across a number of cities. In addition, an institutional functionary known as the “merchant’s representative” had an incentive to insure accurate information about dealings was transmitted between merchants. The merchant’s representative was a trader from a foreign city who established himself in a trade outpost. The representative’s stature in his new city depended on his ability to entice foreign merchants to do business there, which in turn depended on his ability to ensure that traders in the city kept their obligations. This structure of these bridges and clusters enabled reputational information to flow across the Islamic Mediterranean in such a way that network governance could potentially play a major role in supporting Maghribi trade.   

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The Restatement of Consumer Contracts and Quantitative Caselaw Studies — Greg Klass

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Post by Greg Klass

I hope those interested in contract law are aware of the ALI’s project for a Restatement of the Law of Consumer Contracts. It is a major undertaking, both in its attempt to synthesize existing law in this area and as a statement about how common law courts can best address business-consumer transactions.

There is a lot to say on the substance of current draft (which the ALI doesn’t seem to have on its website). The Reporters’ core move is give up on robust ex ante consumer assent—shrinkwrap and browsewrap are both ok, as are notice-only business-side modifications—and to protect consumers through stronger ex post judicial review for substantive unconscionability. I’m not sure this is the all-things-considered best way to go. Mandatory terms crafted by regulators might provide businesses more certainty and consumers more protection. The Reporters’ approach might be the best common law courts can do. But I worry that enshrining it in a Restatement could deter regulatory innovation. That said, I am a big fan of draft sections 6, 7 and 8, which together would limit businesses’ ability to integrate standard terms. The logic of the parol evidence rule falls apart when we know one side hasn’t read the writing in question.

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Harvard Law School’s Private Law Workshop: Oren Bar-Gill & Ariel Porat, Disclosure Rules in Contract Law

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Post by Patrick Goold

Caveat emptor, or buyer beware, was the traditional principle of Anglo-American contract law. Today, however, many common law jurisdictions require the seller to disclose material information to the buyer prior to sale. Nevertheless, the duty to disclose is still subject to debate. Should the law obligate the seller to disclose pertinent information (a mandatory disclosure rule)? Or should disclosure be at the discretion of the seller (a voluntary disclosure rule)? In Disclosure Rules in Contract Law, Oren Bar-Gill and Ariel Porat study how mandatory and voluntary disclosure rules affect sellers’ incentives to invest in pre-sale investigation of goods. Speaking at the final installment of this year’s Private Law Workshop, Oren Bar-Gill explained their conclusion: that mandatory disclosure rules typically, but not always, provide sellers with efficient incentives to acquire socially valuable information regarding the asset.  

Imagine the following example. Having lived in a house for 10 years, the owner suspects there is water beneath the house that might damage its foundations. Before selling the property, the owner could hire a surveyor to investigate whether underground water exists. Whether hiring a surveyor is efficient depends on the value of the information investigation reveals relative to the cost of acquiring it, i.e. hiring the surveyor.

In 1994, Steven Shavell studied how mandatory (MD) and voluntary disclosure (VD) rules affected the incentives of sellers to undertake such investigations. Shavell found that MD rules create efficient incentives, while VD rules do not. If the owner knows that any information the investigation reveals must be disclosed, then he will only invest in the investigation if the expected increase in value to the asset outweighs the cost of the investigation. Conversely, voluntary disclosure rules cause owners to invest too heavily in information-acquisition, on the grounds that any favorable information can be used to demand a higher price, while unfavorable information is simply ignored.

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On Plain Meaning and Pacific Gas — Greg Klass

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Post by Greg Klass

Judge Traynor’s opinion in Pacific Gas & Electric v. Thomas Drayage & Rigging is a bête noire of textualist judges and contracts scholars. Judge Kozinski’s assessment is typical:

Pacific Gas casts a long shadow of uncertainty over all transactions negotiated and executed under the law of California. As this case illustrates, even when the transaction is very sizeable, even if it involves only sophisticated parties, even if it was negotiated with the aid of counsel, even if it results in contract language that is devoid of ambiguity, costly and protracted litigation cannot be avoided if one party has a strong enough motive for challenging the contract.

Trident Center v. Connecticut Gen. Life Ins. Co., 847 F.2d 564, 569 (9th Cir. 1988).

The objection is that permitting extrinsic evidence significantly increases the probability that a court will find ambiguity. The facts in Pacific Gas appear to illustrate the worry. Whereas the scope of the indemnification clause at issue was clear, covering “all loss, damage, expense and liability resulting from * * * injury to property, arising out of or in any way connected with the performance of this contract,” the defendant wanted to introduce extrinsic evidence that in fact the parties meant it to cover only third-party losses. Permitting that evidence in created ambiguity where none existed before.

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Harvard Law School’s Private Law Workshop: Mischkowski, Stone & Stremitzer, Promises, Expectations, and Social Cooperation

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Post by Samuel Beswick, Frank Knox Memorial Fellow, SJD candidate, Harvard Law School

At last Wednesday’s Private Law Workshop, Rebecca Stone presented new experimental evidence on whether, and under what conditions, people regard promises as generating obligations to keep them. Based on a study of some 780 subjects, Mischkowski, Stone and Stremitzer find that people regard the issuance of a promise in and of itself, and the fact of another’s reliance on a promise, as each carrying binding force. They further find an additive effect when the two conditions co-exist—i.e., when a promise is relied upon.

The authors set up a simple vignette study: imagine you are a prospective buyer and have told a seller that you will purchase a product from them for $100 when you get back into town. Depending on the version of the vignette (six versions were randomly assigned to the pool of subjects), you either promised to make the purchase or you stated an intention to buy the product but disavowed any promise to do so. You (the buyer) are told that the seller—in the spirit of Monty Python’s shopkeeper who is alternately rude and polite—either believed your promise, did not believe your promise, or was not sure (again, depending on the version of the vignette, randomly assigned). Finally, you are told that, prior to your return you happen to learn that another seller is prepared to sell you the same product for $85. Subjects are then asked whether they will buy from the original seller or instead buy from the other seller at the lower price.

Mischkowski, Stone and Stremitzer find evidence of three motivations for people’s decisions to keep their promises. First, regardless of whether they made or disavowed a promise to the original seller, subjects who were told that the seller had credited their assertions that they were planning to buy from the seller were more inclined to buy from the original seller than subjects who were told that the seller had not credited or had doubted their assertions (an expectations per se effect). Second, subjects who made a promise, as opposed to those who disavowed any promise, were more inclined to buy from the original seller regardless of what they were later told about the seller’s expectations (a promising per se effect). Third, subjects were most inclined to keep their promises when they had promised to purchase from the original seller and when they were told that the seller was expecting them to purchase the product (an interaction effect).

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Harvard Law School’s Private Law Workshop: Hanoch Dagan and Michael Heller, The Choice Theory of Contracts

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Post by Samuel Beswick, Frank Knox Memorial Fellow, SJD candidate, Harvard Law School

Let’s put freedom back into “freedom of contract.” That’s the ambition Professors Hanoch Dagan and Michael Heller set out in their forthcoming book, The Choice Theory of Contracts, excerpts of which the authors presented at this week’s HLS Private Law Workshop.

Dagan and Heller contend that contract law’s ultimate value is, and ought to be, enhancing individual autonomy. They say that only a “choice theory” of contracts facilitates such autonomy: only when contract law offers a sufficient array of contract “types” will individuals be free meaningfully to author their own destinies. The explication of this liberal theory entails engaging with, and unseating dogma on, two fundamental questions: what is contract? And what is freedom?

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In Trust We Trust — Yonathan Arbel

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Post by Yonathan Arbel

The recent leak of the Panama Papers exposed the public to the magnitude of assets held in offshore accounts. These accounts are often associated with motives such as tax evasion and asset shielding from creditors, although they may be more legitimate motives to locating one’s assets offshore, such as privacy or preference for the rules of a specific legal system.  The estimates of how much is stowed offshore vary significantly, from one to five trillion dollars, an interval so large that it mostly reveals our ignorance. We simply know too little about these accounts, their motives, structures, and value—which, from the viewpoint of those who designed these trusts, is a feature, not a bug.  The most comprehensive work to date on the topic is that of Professors Sitkoff and Schanzenbach, who studied U.S. institutional trustees. However, these trustees are not likely representative of offshore trusts, and so, our understanding of offshore trusts is still foggy.

In a new intriguing paper, forthcoming in the Hastings Law Journal, Adam Hofri-Winogradow is providing us with a glimpse into the clandestine world of onshore and offshore trusts.  Hofri used a combined qualitative methodology of surveying and interviewing providers of trust services. Overall, he surveyed 409 providers of trust services and interviewed 25. Of his many findings, I will highlight just a few.

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Harvard Law School’s Private Law Workshop: Nathan Oman, Reconsidering Contractual Consent

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Post by Patrick Goold

How important is consent in contract law? Less important than many suppose, says Professor Nathan Oman. At the first HLS Private Law Workshop of the new academic year, Oman presented his current work in progress, Reconsidering Contractual Consent: Why We Shouldn’t Worry Too Much About Boilerplate and Other Puzzles. In this thought-provoking article, Oman argues that robustly voluntary consent to obligations is far less important to the normative defense of contract law than is often assumed.

Oman’s analysis begins with a puzzle. Normative theories of contract tend to suggest that party consent is necessary to justify enforcing contractual obligations. For autonomy theorists, holding parties accountable for commitments to which they have not meaningfully consented interferes with their ability to self-govern. For economists, consent is an important indication that the transaction makes both parties better off. But here’s the paradox: contract law regularly does not require meaningful party consent before enforcing obligations. Many situations exist wherein courts uphold agreements where the parties are almost wholly ignorant of the terms – boilerplate terms providing a familiar example.

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Private Law and Asset Shielding — Yonathan Arbel

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Post by Yonathan Arbel,  postdoctoral fellow in private law, Harvard Law School (job market candidate)

One of the central questions in the New Private Law is how ‘down-to-earth’ should legal analysis be? Regardless of one’s substantive view on this debate, there is one area in which we have been insufficiently realistic: private law enforcement. There is a real gap in our understanding of how legal norms are executed by sheriffs, bailiffs, and private ordering. Understanding the limits of doctrine and law could be informative for both economic and justice-based views of the law, as well as to views that look at the law from the internal point of view.

My scholarship focuses on questions concerning the enforcement of private legal norms. In Shielding of Assets and Lending Contracts (Forthcoming, Int’l Rev. L. Econ.) I consider the problem of asset shielding. Most judgments, if not voluntarily implemented, depend on enforcement through the seizure of the judgment-debtor’s assets. The problem is that ownership is too malleable and enforcement is too constrained, so there are many ways in which people can hide, shield, or protect their assets (transfer of money to an exotic offshore trust, bankruptcy planning, sham transfer to one’s relatives, hiding money under the mattress, etc.). Some of these techniques are more complicated than others, and some people will have moral reservations about deploying certain kinds of shielding techniques, or self-interested concerns about the effects of shielding on their credit scores, but overall, there is a real temptation here – especially since criminal enforcement against those who shield is quite rare. Given this temptation, it is puzzling why people do not shield assets more often. More generally, because avoiding judgments through asset shielding undermines many private legal obligations, it is important to have an account of when people would choose to meet their obligations and, if they decide to shield, the magnitude of assets that would be shielded.

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Bagchi, Dagan, and Hesselink at “Contract Law in a Liberal Society” Summer School in June — John Golden

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Post by John Golden

From June 29 to July 1, the University of Amsterdam hosted a “summer school” on “Contract Law in a Liberal Society.”  The gathering featured extended presentations by Aditi Bagchi of the Fordham University School of Law, Hanoch Dagan of Tel Aviv University’s Buchmann Faculty of Law, and Martijn Hesselink of the University of Amsterdam, as well as additional short presentations of completed works or works in progress by more junior scholars.  This post describes aspects of the presentations by Bagchi, Dagan, and Hesselink as I perceived them.

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Who is Entitled to a Fair Price? — Aditi Bagchi

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Post by Aditi Bagchi

Making waves recently was a ruling by the Delaware Court of Chancery that Michael Dell and the private equity firm Silver Lake paid too little for Dell when they bought the company in 2013 in a leveraged buyout. See http://courts.delaware.gov/Opinions/Download.aspx?id=241590. Vice Chancellor J. Travis Laster concluded in an appraisal proceeding that shares were worth about $17.62 rather than the $13.75 that shareholders were paid.

The court arrived at this result without finding that Mr. Dell and management breached their fiduciary duties. To the contrary, they appear to have taken many “praiseworthy” steps in the sales process. No one else came forward with a clearly better offer. The court found, however, that there were structural problems with the accuracy of the market valuation of the company, including some inherent conflicts of interest but, more importantly, limitations in the valuations by potential classes of buyers, including shareholders (short-termism), private equity (high return expectations), and strategic acquirers (integration risk). The result is that the company was found to be worth more than anyone was willing to pay for it.

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More on Fraud in the Performance, this time from the Supreme Court — Greg Klass

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Post by Greg Klass

A few weeks ago I posted on the Second Circuit’s decision in US ex rel. O’Donnell v. Countrywide Home Loans, which held that Countrywide’s knowing delivery of effectively worthless loans to Fannie Mae and Freddie Mac, without disclosing that fact, was not fraudulent. One way to read the decision is as affirming the well established, and to some baffling, rule that a party to a contract has no duty to disclose its breach of the contract, no matter how knowing or material. (For more evidence of bafflement on this count, see Brandon Garrett’s fine post on the case.)

I mentioned in my post that the result might have been different had the Countrywide plaintiffs’ False Claims Act claim not been dismissed. Those who are interested in that road not taken in Countrywide might take a look at the Supreme Court’s decision last Thursday in Universal Health Services v. United States ex rel. Escobar, which addressed the implied certification doctrine under the FCA. In its most robust form (and oversimplifying a bit), the implied certification rule says that the mere act of submitting a claim for payment on a covered contract represents compliance with the contracts material terms, as well as with other governing laws and regulations. Or what is functionally equivalent: If the contract, a law or a regulation requires compliance, there is a duty to disclose any material noncompliance when requesting payment. Had this rule applied, Countrywide would have almost certainly been subject to the FCA’s treble damages and per-claim fines.

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SIOE 2016 — Dan Kelly

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Post by Dan Kelly

 

The Society for Institutional and Organizational Economics (SIOE) (formerly, the International Society for New Institutional Economics (ISNIE)) is hosting its 20th Annual Conference this week, June 15-17, at Sciences Po in Paris, France.  The conference website includes details on this year’s program and links to abstracts and papers.

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Is Equitable Contract Law a Pipe Dream? — Henry Smith

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Post by Henry Smith

At last month’s American Law and Economics Annual Meeting, I attended a very interesting session on Commercial Law and Contracts, at which the first two papers were in tension with each, as were their authors – in a polite way!  The first was “The Common Law of Contract and the Default Rule Project,” by Alan Schwartz and Bob Scott.  They argue that the program over the last century by academics, codifiers, and Restaters (“drafters”) to supply transcontextual defaults rules that apply in a wide variety of contracts was doomed to fail. Common law contract supplied a limited number of defaults that do have this feature, such as expectations damages for breach of contract.  Going beyond these traditional rules faced the drafters with a dilemma.  They did not have knowledge enough to supply defaults that would make sense for particular industries.  So they chose the transcontextual route, but to create additional defaults here required them to fudge the content, opting for fuzzy or underspecified standards based on custom and reasonableness, and commercial parties have not been receptive to these efforts, often opting out of them. 

Source: http://firstyearcontracts.blogspot.com/2010/03/estate-of-mr-george-edward-kent-man-who.html

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The Second Circuit Polices the Contract-Tort Boundary — Greg Klass

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Post by Greg Klass

On Monday the Second Circuit released its decision in US ex rel. O’Donnell v. Countrywide Home Loans. This is a major case—in terms of dollar amounts (the trial court had assessed a $1.27 billion penalty against Countrywide), for understanding the law’s ability to deal with the wrongs that caused the subprime mortgage crisis, and with respect to the legal question of where to draw the line between contracts and torts. There’s much more going on in the case than I can summarize here. But here are some initial thoughts on it. Some of them also appear in Dan Fisher’s excellent piece in Forbes.

The legal framework is a little complex, but the basic thrust of the decision is that there was no evidence that Countrywide ever made a false representation to Freddie Mac and Fannie Mae about the quality of the mortgages it was selling. The initial contract of sale promised to deliver “investment quality mortgages,” but that was just a promise. There was no evidence that at the time Countrywide made it the company intended to do anything else—that it committed promissory fraud. It is clear that Countrywide subsequently intentionally breached that promise by delivering lots and lots mortgages that it knew were crap. (If you haven’t seen or read The Big Short, you might be shocked by Judge Rakoff’s post-verdict summary of the bullshit Countrywide trafficked in.) But, according to the Second Circuit, there was no evidence that it ever made any additional representations—after the initial contract to sell—as to the quality of those mortgages. No lie, no fraud.

A few observations:

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Party Autonomy to Choose a Forum: Philosophical and Historical Justification — Milana Karayanidi

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Student post: Milana Karayanidi

On March 18-19, the Young Comparativists Committee (YCC) of the American Society of Comparative Law (ASCL) hosted its fifth annual global conference at Tulane University Law School. Many scholars presented their papers relating to teaching and writing in comparative law, and more than 100 scholars from 80 countries attended. At the conference, I presented my work on Normative View of Party Autonomy to Choose a Forum in a Comparative Perspective. My paper emphasized the unprecedented rate of recognition of forum selection clauses in international civil and commercial transactions. I discussed theoretical justifications of the principle of party autonomy in choosing jurisdiction, drawing upon Kantian ideas of individual autonomy, non-instrumentalist private law theory accounts, and the increasing dominance of contractual principles within the modern law of civil procedure. In addition, I examined the reasons for limiting party autonomy in view of considerations of equality and certain public interests. Furthermore, I examined the evolution of party autonomy to choose a forum within the national systems of the U.S., Germany and Russia. I argued that some of the rationales behind the historical developments that led to party autonomy recognition in these national systems can be used to justify party autonomy in international dispute resolution.

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Property and “The Right to Include” — Dan Kelly

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Post by Dan Kelly

Donald Kochan (Chapman) recently published an essay, “Property as a Vehicle of Inclusion To Promote Human Sociability,” in JOTWELL—The Journal of Things We Like (Lots).  The essay reviews my article on The Right to Include.  In that article, I attempt to highlight the fact that private property allows owners not only to exclude but also to include others.  Inclusion may occur informally, contractually, or through a range of property forms, from easements and leases to common-interest communities and trusts.  While there are benefits from including others in property (think of Airbnb), there are also costs and potential pitfalls of inclusion—coordination difficulties, strategic behavior, and conflicts over use.  For this reason, I argue, the law enables owners to select from a variety of forms that provide different types of anti-opportunism devices, including mandatory rules, fiduciary duties, and supracompensatory remedies.  Ultimately, I contend that “ownership can be inclusive, rather than exclusive; it can facilitate cooperation, not just result in conflict; and it frequently promotes human sociability, not atomistic individualism.”

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Summer School Announcment: “Contract Law in a Liberal Society” — Yonathan Arbel

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Post by Yonathan Arbel Dr. Lyn Tjon Soei Len, of the University of Amsterdam,  asked to bring this invitation for their very interesting summer-school to the attention of our readers: From June 29- July 1 the Summer School “Contract Law in a Liberal Society” will take place in Amsterdam. Junior scholars and advanced students will have … Read more

Specific Performance in Action – Yonathan Arbel

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Post by Yonathan Arbel

Greg Klass’ recent post (as well as recent essay) raised the issue of efficient breach. Deeply embedded in the debate on efficient breach is the choice of remedies between specific performance and expectation damages. If courts award money damages, then this—in the view of opponents of the efficient breach theory—enables promisors to “buy” their way out of promises. Instead, the argument goes, awarding specific performance would give promisees “what they were promised”.  Contrary to their approach, specific performance is reserved under U.S. law only to (arguably) exceptional circumstances involving unique goods and land.

In my work, I try to show that enforcement matters. Parties do not negotiate or behave in the shadow of the law, I argue, but in the shadow of the sheriff. And conventional theory has tended to downplay and sometimes completely overlook the role of enforcement. Thinking through the lens of enforcement on private law provides new insight on old questions and the question of choice of remedies is no exception.

Looking from this perspective, I conducted a qualitative empirical analysis looking into the motivations of people suing for specific performance and the real-life outcomes of these lawsuits: are judgments implemented? Do people negotiate around them? To what extent do the motivations of litigants differ from their lawyers?

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Efficient Breach? — Greg Klass

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Post by Greg Klass

I just read Robert Scott’s 2015 Boden Lecture at Marquette Law School, “Contract Design and the Shading Problem.” For anyone interested in what’s happening in the economic, instrumental and empirical analysis of business-to-business contracts, this is a great place to start.

There is a lot of interesting stuff in this piece, but here I want to mention only Scott’s argument that we’ve all been paying too much attention to the theory of efficient breach. This is a remarkable claim from the scholar who, together with Charles Goetz on 1977, coined the term “efficient breach,” and did as much as anyone to promote the theory early on. Scott now considers it unsatisfactory for an empirical reason: the theory does not describe most breaches. Rather than one party deciding it is in its interest to breach and pay damages, most breach of contract cases involve disputes—sincere or opportunistic—as to what the contract requires. The breach did not increase the size of the pie, but resulted from disagreement about how the pie was supposed to be divided. Theories that emphasize efficient breach therefore ignore what parties, at the time of contracting, really care about: avoiding disagreement in the gray zone, or what Scott calls “shading.” Scott concludes that, “while we meant well, Goetz and I are probably primarily responsible for leading a generation of scholars down the wrong garden path.”

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How Not to Read Bonds — Aditi Bagchi

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Post by Aditi Bagchi

In 2001, Argentina defaulted on about $92 billion worth of bonds.  It subsequently restructured these bonds, and 93% of bondholders accepted the 30 cents on the dollar that Argentina offered.  But some hedge funds bought the original bonds at a discount and held out on repayment.  They were able to persuade Judge Griesa in New York that a pari passu clause in the original bonds prohibited Argentina from treating new bonds differently than the original bonds, and the judge actually issued an injunction prohibiting Argentina from making payments on the new bonds – effectively locking Argentina out from capital markets.

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