Can Contract Clauses Replace Bankruptcy Principles?

Imagine we could create a bankruptcy procedure from scratch. Which aspects would be different, and which inevitable? This question has spurred academic debate and policy reform, but no system of bankruptcy law has been re-made from scratch. Less noticeably, market players have been experimenting for years with contract clauses in debt transactions that fulfill a function equivalent to bankruptcy rules. The presence of 'contractual' solutions often stirs debate on the enforceability of such solutions. However, parties in these transactions tend to insulate the effects of contract solutions, ruling out an externalities argument justifying intervention.Instead, this article argues that it is the notion of a 'pure contractual solution', which is hard to pin down. When parties try to achieve complex managerial and distributive solutions through contract clauses courts will need a framework to interpret those clauses. The article tests three hypotheses in light of case law on complex debt transactions: first, the transaction parties and lawyers overestimate their ability to draft clearly and without gaps; second, once a gap is identified, the process to establishing 'meaning' will to a great extent consist in determining the clause's 'function', i.e. so-called 'literal' interpretation will be infrequent absent an understanding of the overall purpose of the clause, and its place in the 'system' devised by the parties; third, in making such functional interpretation courts will often slip into a logic akin to that of bankruptcy principles, even when the parties have signaled their intention to resolve the issue contractually, if they cannot draw a competing logic from the clauses. The discussion of these hypotheses draws lessons, and open new avenues of research about the proper approach to contractual gap-filling, the reasons for the pervasive nature of bankruptcy principles, and the need for parties to prioritize the clarity of the 'system of clauses' and their functionality, over drafting clarity of individual clauses