Judge Posner famously wrote that “the fundamental function of contract law . . . is to deter people from behaving opportunistically toward their contracting parties.” Deterrence from opportunistic behavior is motivated by the good intention of protecting potential victims of that behavior. But in the realm of contract law, good intentions do not make good law. The way to hell is paved with good intentions. At least within the bondholder-issuer context, judges are, at best, inconsistent in protecting victims of opportunistic behavior.
The only consistency has been the constant whittling away of any contractual protections for bondholders. Now, after decades of well-intentioned jurisprudence, what is left over for a bondholder after signing a bond contract is at the whim of the courts. Unfortunately, the whim of the courts appears to favor a position that, rather than adhering to the fundamental function of deterrence, actually encourages opportunistic behavior to the detriment of bondholders.
One highly contentious contractual provision that has become a vehicle for opportunistic behavior is the bond indenture’s standard no-action clause. The no-action clause precludes a bondholder from bringing a claim against the corporation to enforce his contractual rights. Essentially, each bondholder has waived his or her right to bring claims relating to the security against the debtor. This waiver turns the bondholder into a dependent of the corporation and its trustee.
This Comment explores the courts’ use of the no-action clause in quashing meritorious lawsuits and the policy implications of the no-action clause. This Comment also proposes that the standard no-action clause should be void in certain circumstances.
