Choice-of-Law Clauses in U.S. Bond Indentures

Abstract

Over the past few decades, the state and federal courts in New York have adopted a number of interpretive rules that they use exclusively to construe choice-of-law clauses. Several of these rules produce outcomes that are arguably inconsistent with the expectations of most contracting parties. Drawing upon a hand-collected dataset of 351 form bond indentures filed with the SEC, this Article seeks to determine whether the choice-of-law clauses in these indentures have been updated to account for these adverse interpretive decisions. In a surprising number of instances, it finds that these clauses have not been updated. The Article argues that this inattention likely stems from the fact that neither the issuers nor the underwriters nor the lawyers who advise them view the ancillary language in the choice-of-law clause — everything except the words “New York” — as particularly important. Since most new indentures are based on past templates, choice-of-law clauses in old agreements routinely slip into new agreements without discussion or alteration.The effect of this inattention is to expose the issuer to unnecessary legal risk. To address this risk, the article proposes “model” clause language for drafters to incorporate into future bond indentures. The use of this language will, in the author’s view, substantially reduce the risk that claims relating to an indenture will be governed by the law of a state other than New York.