Choice-of-law clauses in US bond indentures

Abstract

... The choice-of-law clause is an afterthought in most US bond indentures.1 Once the drafters confirm that the indenture will be governed by New York law, they move on to other topics. In this article, I argue that such inattention exposes the issuer to unnecessary legal risk. Over the past several decades, the state and federal courts in New York have developed several interpretive default rules that they use exclusively to construe the ancillary language in these clauses—everything except for the word ‘New York’. Several of these interpretive rules produce outcomes that are arguably inconsistent with the expectations of most parties. While it is possible to contract around these interpretive rules, surprisingly few indentures do so. This means that claims relating to these indentures may not actually be governed by New York law. In identifying a possible solution to this problem, the article first provides a thick descriptive account of the interpretive rules developed by the New York courts. It then draws upon a hand-collected data set of 351 public company bond indenture forms, all of which were filed in 2016, to determine whether the choice-of-law clauses in these agreements have been updated to account for these interpretive decisions.2 In many instances, it finds that these clauses have not been updated, thereby exposing the issuer to some modest degree of additional legal risk.