Mitu Gulati and Robert E. Scott have written a fascinating study that touches on some of the most important issues in lawyering and law. A Belgian court rendered a judgment that highlights a significant risk in a common sovereign bond provision. Specifically, the court interpreted a contract requiring the Republic of Peru to pay its creditors pari passu to say what it seemed to say—that Peru had to treat its creditors equally. The court accordingly enjoined a clearing house from allocating to creditors funds it received from the Peruvian government pursuant to a restructuring agreement without proportionally paying the plaintiff, a hedge fund which had declined to join the agreement.
Since these are high-value deals negotiated by prestigious and expensive lawyers, one might expect sovereign bond contracts to have swiftly changed to mitigate the risk. But this did not happen. Gulati and Scott seek to explain this puzzle by interviewing hundreds of lawyers with knowledge of the relevant contracts and distilling their responses. They make the mass of raw material cogent by viewing it through the lens of legal and economic theory.