Abstract:
It is a widely held assumption that sophisticated parties prefer arbitration over litigation. Theory suggests that the preference for arbitration is even more pronounced in cross-border relationships due to the existence of a fundamental distrust of a foreign nations’ courts. However, reliable empirical evidence to support these assertions is scarce.
Based on almost half a million contracts filed with the SEC between 2000 and 2016, this study systematically identifies the role of arbitration in international business contracts. Contrary to the commonly held belief, it finds that arbitration clauses are neither widely adopted nor more frequent in international contracts than in domestic contracts. And when arbitration clauses are used, they serve as a mechanism to strategically reduce the discretion granted to the courts enforcing the decision. Absent serious threats to the enforcement of a foreign decision, parties generally prefer courts over any form of arbitration. The results imply that, on the ‘market for contracts’, arbitration is viewed as a second-best alternative to a well-functioning domestic court system that nonetheless fulfills two important functions: First, it incentivizes governments to increase the efficiency of their domestic court proceedings in order to retain a significant market share. And second, arbitration helps businesses from countries with a judiciary that poses a hostile environment to the enforcement of foreign court decisions to engage in pareto-efficient contractual relationships.
Nyarko, Julian, Forum Shopping on the Market for Contracts: When Corporations Arbitrate (August 10, 2017).
First posted 2017-09-06 06:39:18
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