Interpreting Argentina’s “Uniformly Applicable” Provision and Other ...

Mark Weidemaier & Mitu Gulati

Over the past week, we’ve discussed various uncertainties over how to interpret the new “uniformly applicable” standard added to aggregated Collective Action Clauses starting in 2014 (here and here). Anna Gelpern’s recent post neatly clarifies some of the issues and provides crucial background on the “uniformly applicable” provision. Oversimplifying, the “uniformly applicable” standard was an attempt to assuage creditor fears that sovereigns would exploit aggregated voting to discriminate among bondholder groups. The intent of the clause was to ensure bondholders got roughly—but as Anna points out, not literally—the same treatment. Our prior posts have focused on how the text of the standard might be stretched to forbid certain unanticipated restructuring scenarios, especially when courts perceive the sovereign to be acting irresponsibly or vindictively. That’s precisely the situation in which courts are willing to stretch the meaning of contract text. It’s what happened to Argentina in the pari passu litigation.

In this post, we focus on the broader question of how courts should approach the interpretation of bond clauses like this one. When presented with disputed but plausible interpretations of a text, courts normally try to uncover the intent of the contracting parties and interpret the contract consistently with that intent. (This is a generalization, but accurate enough for our purposes.) But bonds and other (largely) standardized contracts are different. For the most part, the point of standard language is to ensure standard meaning. That goal isn’t served, and can be undermined, when courts inquire into the subjective intentions of the parties to any particular contract. But if their intent isn’t relevant, whose is? Greg Klass, in a new article “Boilerplate and Party Intent,” offers an insightful way of thinking about these problems.

Argentina’s “uniformly applicable” standard offers a good example of the difficulty. The government officials responsible for negotiating sovereign bond deals generally want to adhere to a set of “market standard” non-financial terms. They have only a vague sense of the specific language of most contract terms. Likewise, many investors have told us that they paid little attention to the “uniformly applicable” language in Argentina’s bonds until Argentina went into crisis. They knew the bonds had CACs and, more concretely, that the clauses featured aggregation provisions. But, beyond that, they didn’t know the details. So a search for the intent of the parties—defined as the bondholder and the government—won’t turn up much of value. (In theory, underwriters are part of the equation, but their incentives are to get the deal done – and using standard forms helps get deals done.)

Anyway, it isn’t clear that a bond contract’s meaning should be determined by the intentions of the parties to that bond. Maybe some parties use standardized forms for idiosyncratic reasons. If a court is convinced of this in a particular case and can identify the parties’ actual intentions, there may be little harm in interpreting the contract in accordance with their intentions. Greg gives an example in Part IV of this article, using a 2004 Oklahoma case, Stephenson v. Onoek Resources Co. But this assumes the court makes clear that its interpretation is driven not by the text but by the idiosyncrasies of the parties before it. If not, other courts might adopt its interpretation, defeating the expectations of most users of the contract.

We think cases like Stephenson are outliers. Most parties use the standard form because they want the standard meaning, even if they do not know what that meaning is. But then, if the text isn’t clear, whose intent can help clarify it? 

With regard to the new aggregated CACs and the “uniformly applicable” standard, there are a few possibilities. Anna’s post highlights most of them, so we will keep this discussion brief.

The process of creating these new CACs was fairly transparent, and there is something approximating a legislative history. Roughly, the development of the CACs involved three stages. First, the U.S. Treasury organized a committee of market participants, official sector representatives, and big institutional players such as the French Tresor. Then, after a process of consensus-building, the actual drafting work was assigned to a very small group of lawyers. Finally, an industry association (ICMA, the International Capital Markets Association) and the IMF worked to persuade investors and debt managers to adopt the new clauses. (For discussion from some of the key participants, see here, here, here, here and here).

So, there is a wealth of available information concerning the intent of the clause. But again, whose intent should be privileged as a source of meaning? Greg’s article distinguishes the intent of the authorizer (here, the committee participants, but of course they represent varied interests) from the intent of the author (the lawyers). We also have third parties like the IMF, which plays a key structural role and worked to market the clause. And, of course, we have the governments who ultimately issued, and the investors who bought, particular bonds.

Traditional modes contract of interpretation would assign prominence to the intentions of government officials and investors. But in this context, these actors may have the least knowledge of the intent behind the “uniformly applicable” standard.So perhaps it would be best to resolve the disagreement by consulting the authorizers: the representatives who sat through committee meetings and ultimately reached a consensus. But these representatives agreed on relatively broad principles—here, that investors should get roughly the same treatment in an aggregated vote. Disputes over contract meaning rarely occur at this level of generality; they are particularized. (Does sub-section A of clause B permit outcome C under circumstances D, E, etc…?) And because the authorizers included representatives from a broad spectrum of interest groups, they may have different views and fuzzy memories about such narrowly-defined questions.

The lawyers are another potential source of insight, because they did the drafting and likely gave some thought to the various types of disputes that might implicate the “uniformly applicable” standard. Perhaps they can explain how the contract language attempts to address these possibilities. But they are agents, acting at the behest of the committee that negotiated the basic parameters of the new CACs. Moreover, unlike governments, investors, the IMF, and other key players, the lawyers do not really have a stake here. Disputes over the meaning of the clause do not directly implicate their interests.

It would be relatively unusual for a court to consider evidence of this sort in an “ordinary” contract dispute, except insofar as the evidence showed a relevant trade usage. But in a dispute over the meaning of the “uniformly applicable” provision, maybe courts should assign significant weight to the intentions of the authorizers and authors. Greg’s discussion of the 2015 Lehman Brothers v. Intel case gives an example involving an interpretive dispute over the ISDA Master Agreement. The court there looked primarily at two sources of insight: the industry association’s understanding of the disputed clause (they filed an amicus brief), and testimony of the lawyer who had drafted the agreement.

We do not mean to suggest that the foregoing will be easy. Even in a case like ours, which involves a relatively new clause with a relatively clear origin and history, interpretation presents difficult issues. In the ex post context of litigation, how hard will it be for a litigant to find one or more credible witnesses to support its preferred meaning of the clause? Perhaps even a witness who played a key role in the discussions that produced the clause? That’s what happened in the pari passu litigation. There were credible experts willing to support each side’s position. As Anna points out in her post, the pari passu clause was different because there was no consensus as to what it meant. That’s true, but perhaps not much of a distinction. If you had asked around before the litigation, there would have been widespread if not universal agreement that the pari passu clause did not have the meaning proffered by NML. As a matter of basic contract law, that should have ended the dispute in Argentina’s favor. But in the context of litigation, things that are often taken as “fact” often reveal themselves to be much less certain. And therein lies the source of the risk.