Yes there is.  RFC854, published in 1983.

Exploiting telnet holes?  By knowing what client is being used?  This I've got to hear!  Your coder is right in that if your client is programmed to do so, it can ignore the request or even lie (many http bots lie and say they're Internet Explorer for example).  However, if you try logging onto your shell with zMUD, chances are good (although it depends on the shell) youll get a message something like, "No templates defined for zMUD".  Guess how the shell magically knew you were using zMUD.

No.  You send the request for client type.  If you get no answer, or a client you don't recognize, do it the old way and manually ask the player for all the configuration preferences.  However, if the client responds that it is, indeed, zMUD, or Windows telnet, or putty, etc., act accordingly.  Your coder is certainly correct that there is no "one size fits all" solution when it comes to terminal gaming, but that's like forcing everyone who enters a shoe store to immediately have their feet measured no matter whether they need it or not, because of the few individuals who don't know their shoesize.