The problem with arbitration agreements.

• Author: Choi, Stephen J.
• Position: Response to artible by Thomas Carbonneau in this issue, p. 1189

Arbitration procedures today have become highly standardized. Institutions such as the International Chamber of Commerce (ICC), (1) the London Court of International Arbitration (LCIA), (2) and the American Arbitration Association Center for International Dispute Resolution (AAA) (3) each have detailed provisions for administering arbitration proceedings (often involving parties of different nationalities). (4) Parties entering into arbitration can expect to have limited discovery, a hearing, and the ability to bring attorneys to the proceedings. (5) While typically providing less process than formal court proceedings, (6) the standardized nature of arbitration can lead parties to view arbitration much like court proceedings--a fixed, predetermined process to settle disputes. Thomas Carbonneau's article, The Exercise of Contract Freedom in the Making of Arbitration Agreements, reminds us of the contractual roots of arbitration. While arbitration has become standardized, parties retain the ability to vary aspects of arbitration. Carbonneau points out various ways in which parties may modify arbitration terms and makes the normative claim that sophisticated parties should affirmatively consider doing so. (7)

In Carbonneau's idealized world of contracting, parties would take into account a variety of factors in tailoring their agreement to fit the specific needs of the parties. (8) Among other things, Carbonneau describes how parties may wish to customize the following: the governing law; (9) the venue for arbitration (and the corresponding rules of practice for foreign attorneys); (10) whether arbitration is to take place on an ad hoc basis or under the auspices of one of the institutional arbitration providers (including the ICC and the LCIA); (11) how the arbitrators are to be selected (and their compensation and qualifications); (12) what devices to employ to foster collegiality among multiple arbitrators and provide for their accountability; (13) who is to have ultimate authority in the arbitration proceedings (the arbitral institution, the arbitrators, or the parties to the dispute); (14) procedural aspects of the arbitration including discovery, evidentiary rules, and how witnesses are handled; (15) whether arbitrators must provide reasons with their decision; (16) and finally the standard of judicial review for arbitration awards. (17)

As a starting point to assess Carbonneau's article, assume that different contracting parties would in fact desire varying arbitration agreement terms. Some parties might prefer extensive discovery while others might not. Some contracting parties might wish to have attorneys present during an arbitration hearing while others might prefer to represent their own interests more informally. Given varying preferences for arbitration terms, what might cause parties not to negotiate for different arbitration agreement terms? One possibility is that parties may lack the sophistication to negotiate an agreement in their best individual interests. For consumers faced with mandatory arbitration, imposed through contracts of adhesion, such a concern is certainly material. However, Carbonneau has a different set of parties in mind: sophisticated business parties often contracting across international boundaries. (18) Carbonneau is correct in arguing that such parties--should they desire--possess the ability to negotiate for highly specific arbitration contracts.

A fundamental question therefore arises from Carbonneau's analysis: why do sophisticated parties not already internalize Carbonneau's advice and tailor arbitration agreements? Put another way, why do sophisticated parties (presumably represented by attorneys) need Carbonneau's article to remind them of the ways in which they can modify arbitration agreements? (19) Simply possessing the ability to negotiate complex arbitration agreements does not necessarily mean that parties will desire to do so. Even for sophisticated parties, contracting is an expensive proposition for several reasons. (20) First, parties must consider how others (including courts) may interpret the wording of newly negotiated contractual terms. Michael Klausner, among others, has written on the value of certainty in contract terms. (21) Parties attempting to craft variations to standardized terms run the risk of having a court (or other interpreting body) later misinterpret the terms. The more parties use a standardized term over time, the more certainty the term achieves--giving rise to a network externality effect. (22) Even substandard arbitration terms may then persist, to the extent parties fear the uncertainty from deviating from such terms.

Second, network...