An Empirical Study of Dispute Resolution Clauses in International Supply Contracts.

Author:Coyle, John F.

TABLE OF CONTENTS I. INTRODUCTION 325 II. SAMPLE AND LIMITATIONS 328 III. CHOICE-OF-LAW CLAUSES IN INTERNATIONAL SUPPLY CONTRACTS 330 A. Background 330 B. Empirical Results: Provisions in Choice-of-Law Clauses 333 1. Jurisdiction Selected 334 2. Interpret, Construe, Govern 335 3. Conflict-of-Laws Rules 336 4. Scope 338 5. Substance and Procedure 339 6. Miscellaneous Issues 340 7. Federal Law 341 8. Carve-Outs for Intellectual Property 342 IV. ARBITRATION CLAUSES IN INTERNATIONAL SUPPLY CONTRACTS 342 A. Background 343 B. Empirical Results: Choice between Arbitration and Litigation 347 C. Empirical Results: Length and Complexity 348 D. Empirical Results: Provisions in Arbitration Clauses 349 1. Step/Escalation Clauses 349 2. Scope of the Arbitration Clause 350 3. Carve-Outs from Arbitration 353 4. Delegation Clauses 354 5. Ad Hoc Arbitration/Choice of Institution 355 6. Hearing Location or Arbitral Seat 356 7. Language of the Arbitration 361 8. Arbitral Tribunal 362 9. Arbitral Procedures 365 10. Confidentiality 367 11. Remedies 368 12. Awards and Costs 370 13. Post-Award Proceedings 372 V. FORUM SELECTION CLAUSES IN INTERNATIONAL SUPPLY CONTRACTS 373 A. Background 374 B. Empirical Results: Provisions in Forum Selection Clauses 375 1. Jurisdiction Selected 376 2. Scope 377 3. State or Federal Court 378 4. Jurisdiction and Venue 379 5. Forum Non Conveniens 381 6. Service of Process 381 7. Enforcement of Judgments 382 VII. CONCLUSION 382 I. INTRODUCTION

One notable gap in the growing empirical literature on the terms and provisions of contracts is studies of the dispute resolution clauses in international commercial contracts. (1) A number of studies have examined the terms and provisions of arbitration clauses in domestic US contracts, including consumer, (2) franchise, (3) CEO employment, (4) and material corporate contracts. (5) But while several studies have examined the use of arbitration clauses and forum selection clauses in international contracts, only rarely have the studies looked beyond the basic choice between arbitration and litigation to the detailed provisions of those clauses. (6) Choice-of-law clauses have attracted even less academic attention.

This Article takes steps toward filling this gap in the empirical literature. It provides a detailed analysis of the terms and provisions of choice-of-law clauses, arbitration clauses, and forum selection clauses in a hand-collected dataset of 157 international supply contracts. Some findings worthy of note include the following:

Prevalence of Dispute Resolution Clauses, Virtually all the international supply agreements in the sample (99 percent) contained a choice-of-law clause. Slightly more than half of the agreements (55 percent) contained an arbitration clause. Just over a third of the agreements (36 percent) contained a forum selection clause.

New York as Neutral Jurisdiction. When the parties to international supply agreements involving at least one US party chose a "neutral" jurisdiction with no connection to either party, they overwhelmingly gravitated to New York in their choice-of-law clauses, their arbitration clauses, and their forum selection clauses.

Gaps in the Choice-of-Law Clauses. Most of the choice-of-law clauses (80 percent) in the agreements did not address the issue of scope (i.e., whether the chosen law applies to tort and statutory claims as well as contract claims). A similar percentage (76 percent) did not address the distinction between substantive and procedural law.

The CISG. The parties expressly opted out of the United Nations Convention on Contracts for the International Sale of Goods (CISG) in 39 percent of the international supply agreements. They expressly opted in to the CISG in less than 1 percent of the agreements. Slightly more than 60 percent of the agreements contained no express reference to the CISG.

Departures from Model Arbitration Clauses. Most of the arbitration clauses departed in notable ways from the standard language suggested by international arbitration institutions. For example, the 86 arbitration clauses in the sample included 70 different formulations of the language defining the scope of the clause, and barely one-third (37.2 percent) expressly identified the arbitral seat (most clauses instead identified a location for the arbitral proceeding).

Class Arbitration and Confidentiality. Almost no arbitration clauses in the sample expressly precluded class arbitration, and few imposed any obligation of confidentiality on the parties.

State and Federal Court. Most of the forum selection clauses selecting a US jurisdiction did not evidence a preference for either state or federal court. Among those clauses that expressed a preference, slightly more parties opted to litigate in state court rather than in federal court.

Part II describes the sample and the limitations of the study's findings. Part III examines the choice-of-law provisions in the contracts. Part IV describes the arbitration clauses in detail, while Part V describes the forum selection clauses in detail. Part VI concludes by discussing some of the normative implications of the Article's findings.

  1. SAMPLE AND LIMITATIONS

    The sample consists of 157 international supply contracts collected from filings with the U.S. Securities and Exchange Commission (SEC) from January 1, 2011, through December 31, 2015. A team of research assistants were instructed to search for "supply /2 agreement" in the "Material Contracts" section of the SEC's EDGAR database. (7) These searches resulted in 5,549 hits. A research assistant then reviewed each of these agreements to determine whether the contract at issue was an "international" supply agreement involving at least one non-US party. Once this initial review was complete, there remained 248 international supply agreements. Duplicate contracts, amendments to previous contracts, and contracts that were formatted in a manner that made them unreadable were then removed from the sample. Once this process was complete, there were 157 unique agreements remaining, which comprise the sample analyzed in this Article.

    Several characteristics of the sample are worth noting. First, as already stated, the sample is limited to international supply contracts. As discussed in Part IV.A, the use of dispute resolution clauses varies substantially across different types of contracts. (8) Accordingly, one must be very cautious in extrapolating these findings to types of contracts other than the type studied.

    Second, almost all of the contracts in the sample have at least one US party, meaning (because they are international contracts) they almost always were entered into between a US party and a non-US party. (9) The US party was the buyer in 102 of the contracts and the seller in 52, with the remaining 3 contracts between non-US parties. (10) Because the empirical results here are essentially limited to contracts with a US party, they may not be generalizable to contracts between non-US parties.

    Third, the contracts in the sample were all identified by the filing party as "material" contracts, defined by SEC regulations as contracts "not made in the ordinary course of business." (11) The contracts studied thus do not include routine contracts and may not be representative of such contracts. (12) As stated by Mark Weidemaier, "[b]y definition, material contracts are not representative of all contracts." (13)

    Fourth, the contracts in the sample are concentrated in three industries; contracts from other industries may differ. (14) Far and away the most common industry for the contracts in the sample was the pharmaceutical industry, (15) comprising 45.9 percent (72 of 157) of the contracts. Companies producing medical supplies (16) (18 of 157, or 11.5 percent) and electronic components and accessories (17) (12 of 157, or 7.6 percent) were the only other industry groupings with ten or more contracts in the sample.

    Fifth, while the contracts in the sample were all filed with the SEC from 2011 through 2015, some were entered into between the parties before those years. As summarized in Table 1, 68.2 percent (107 of 157) of the contracts were entered into from 2011 through 2015. By comparison, 22.9 percent (36 of 157) were entered into between 2007 and 2010, and 5.7 percent (9 of 157) were entered into before 2007. (The date of contracting was missing for 3.2 percent (5 of 157) of the contracts.) To the extent the terms of dispute resolution clauses change over time, the results here might not reflect the current state of such provisions. (18)

  2. CHOICE-OF-LAW CLAUSES IN INTERNATIONAL SUPPLY CONTRACTS

    This Part provides a detailed look at the provisions included in choice-of-law clauses in the sample of international supply contracts. It first discusses prior studies that have looked at the provisions in international choice-of-law clauses. It then examines these provisions in the sample of international commercial agreements reviewed for this Article.

    1. Background

      The empirical studies relating to choice-of-law clauses may be usefully sorted into two baskets. The first basket contains studies that seek to determine which jurisdictions (e.g., New York) are named as the governing law. The second basket contains studies that are less focused on the choice of jurisdiction than on the other language in the clause. To date, most of the empirical research in this area has focused on the first issue. The results of the most significant studies from the past decade are briefly recounted below.

      In 2009, Theodore Eisenberg and Geoffrey Miller reviewed 2,865 contracts filed with the SEC over a seven-month period in 2002. (19) Their goal was to identify the governing law for each agreement. They found that New York occupied a dominant position in this regard--it supplied the governing law in roughly 46 percent of the agreements. (20) Delaware was a distant second at 15 percent, and California came in third at just under 8 percent...

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