Author: Christopher R. Drahozal*
Published: December 2011
The standard view is that parties agree to arbitration – to use private judges rather than public court judges to resolve their disputes – because arbitration is a process that improves upon the court system for dispute resolution. On this view, arbitration may be preferred to litigation because it is cheaper and faster; because it enables parties to pick a decision maker (the arbitrator) who is an expert in the field; or because it provides a neutral forum (a reason most commonly cited for international disputes);3 among other reasons. Some commentators, however, have argued that parties use arbitration for substantive reasons – to “ensur[e] that the contracting parties’ preferred substantive law is applied.” For example, Lisa Bernstein concluded from reviewing a sample of trade association arbitration awards that the commercial parties opted for arbitration to have their disputes resolved by decision makers who applied more formalistic rules of decision than courts would have applied. Others have argued that an important reason parties use arbitration for international disputes is the ability to have arbitrators apply anational rules of decision instead of national law.
This article examines why it is that parties agree to arbitrate. Or more specifically, it examines whether parties agree to arbitrate for procedural reasons or for substantive reasons. Of course, these categories of reasons are not mutually exclusive. Parties may agree to arbitrate for both procedural and substantive reasons, and some reasons may be both procedural and substantive (depending on how procedure and substance are defined). Moreover, the reasons parties agree to arbitrate likely vary across types of parties and types of contracts. Just as there is no single reason why parties agree to arbitrate, there is no single answer to whether they agree to arbitrate for procedural or substantive reasons. But there may be more common reasons and less common reasons, and it is the relative frequency of the reasons that I explore here.
*John M. Rounds Professor of Law and Associate Dean for Research and Faculty Development, University of Kansas School of Law. This paper was prepared for the Osler, Hoskin & Harcourt LLP Distinguished Lecture in Business Law, Queen’s University School of Law, Kingston, Ontario. I appreciate the very helpful questions and comments from those who attended the lecture, with special thanks to Josh Karton.