Promise and Peril: Doctrinally Permissible Options for Calibrating Procedure Through Contract

• Publication year: 2021
• Citation: Vol. 95

95 Nebraska L. Rev. 787. Promise and Peril: Doctrinally Permissible Options for Calibrating Procedure Through Contract

Promise and Peril: Doctrinally Permissible Options for Calibrating Procedure Through Contract

H. Allen Blair(fn*)

TABLE OF CONTENTS

I. Introduction .......................................... 788

II. The Gains from Customized Procedure ................ 792
A. A Brief Primer on the Economic Theory of Procedure in Dispute Resolution ................... 793
B. The Current Default Rules of Procedure ........... 799
C. The Potential Benefits of Procedural Customization through Contract .................................. 802
1. Curbing Post-Dispute Opportunism ............ 807
2. Reinforcing Substantive Obligations ............ 809
3. Mitigating Risk ................................ 811
4. Reducing the Direct Costs of Litigation ......... 812

III. The Limited Empirical Evidence ...................... 813

IV. The Doctrinally Permissible Options for Calibrating Procedure Through Contract .......................... 815
A. Procedure as Public Law: Historic Skepticism of Private Procedural Ordering ....................... 817
B. Mere Contract Law No More: Autonomy and Private Procedural Ordering ............................... 820
C. State Courts, Lower Federal Courts, and Procedural Autonomy ......................................... 828

V. Conclusion ............................................ 829

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Nothing is of more immediate practical importance to a lawyer than the rules that govern his own strategies and maneuvers; and nothing is more productive of deep and philosophical puzzles than the question of what those rules should be.(fn1)

I. INTRODUCTION

For a long time, arbitration was the only game in town for parties who wanted more flexibility in the adjudication of their disputes. They faced a dichotomous choice between accepting the public court system and its attendant procedural rules or opting out entirely and resolving their disputes in arbitration. Private process, however, "has migrated in surprising ways into the public courts: despite public rules of procedure, judicial decisions increasingly are based on rules of procedure drafted by the parties . . . ."(fn2) This sort of private procedural ordering gives parties the ability to unbundle the off-the-rack procedures applied in public courts and bargain about individual rules.(fn3) Customized procedure, in short, offers parties much of the flexibility that once seemed the prerogative of arbitration while maintaining the advantages of public adjudication, including, most significantly, rights to appeal and public subsidization. While arbitration has arguably be-

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come more like litigation,(fn4) litigation may be becoming more like arbitration.(fn5)

The promise of more flexible public adjudication presents parties with significant benefits.(fn6) If public procedure is seen as a set of defaults rather than immutable or mandatory rules, then parties may negotiate over the contents not only of their substantive obligations but also of their preferred enforcement mechanisms.(fn7) A default regime allows parties to design organizational frameworks within which the integrity of a contractual relationship is decided and maintained, calibrating accuracy and efficiency to meet their preferences.(fn8) Pre-dispute procedural contracting allows parties to create additional incentives for performance, avoid opportunistic and socially wasteful ex post litigation spending, and limit risk by leveraging their collective interests and shared ignorance about what the future may hold. Post-

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dispute procedural contracting allows parties to tailor the adjudication process in light of their unique and potentially differing evaluations of a dispute in order to constrain litigation expenditures and mitigate risk.

Given the potential gains from finely tuned procedure, it is puzzling that current empirical evidence suggests that few parties explore the full range of customization theoretically available to them.(fn9) Indeed, while the evidence we have is far from perfect, it seems to indicate that parties are doing precious little fine-tuning, at least ex ante. Although parties routinely engage in a few sorts of coarse pre-dispute customizations-choosing to arbitrate or engage in some other form of alternative dispute resolution, waiving rights to a jury, picking a law to govern their deals and selecting a forum for their disputes-it does not appear that parties regularly attempt more precise calibrations of procedure. It is less clear how often and to what extent parties may be engaging in fine-tuning of procedure after a dispute has arisen, though commentators have speculated that such agreements are similarly rare.(fn10)

One key explanation for the relative dearth of fine-grained procedural customization, and the explanation that many commentators rely on, might be that the practice constitutes a radical departure from current doctrine.(fn11) It might be that the costs of innovating in the face of doctrinal norms or trying to change those norms are simply too steep for any single party to bear, especially given worries about freeriding.(fn12)

This Article evaluates this doctrinal explanation for the puzzle created by the gap between the potential gains of customized procedure and the apparent reality that parties do little of it, at least before a dispute arises. It concludes that a close look at the doctrine does not bear this story out. To the contrary, while express authorization for

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many forms of customized procedure does not exist, the current trend of doctrine could not be clearer: courts seem ready to enforce parties' autonomous procedural choices. Accordingly, there are minimal risks that a court will refuse to enforce or abide by a procedural customization so long as it does not suffer from some fundamental contract formation flaw, like unconscionability or fraud.

The conclusion reached in this Article leaves the animating puzzle unsolved. It also leaves significant and important normative questions about the desirability of private procedural ordering unanswered. I take up these two matters in separate articles.(fn13) But in this Article, by precisely articulating the benefits of the practice, surveying the existing empirical evidence about it and addressing its doctrinal feasibility in detail, I hope to clear a path to a better understanding of the promise and peril of procedural contracting.

This Article proceeds in three parts.

In Part II, I analyze the potential efficiency gains for parties from private procedural ordering. I begin by rehearsing the basic economic justifications for procedural rules and then turn to sketching the core features of current public procedural rules. Next I outline the benefits that parties might realize from seeing public procedural rules as defaults that can be varied.

In Part III, I present the existing empirical evidence regarding the degree to which parties seem to engage in procedural contracting. This evidence, while imperfect, indicates that outside of a few traditional and relatively coarse areas of customization, parties seem uninterested in exploring the promise of fine-tuned procedure, at least ex ante. The evidence suggests, however, that parties may be doing more individualized and tailored procedural contracting ex post.

In Part IV, I evaluate the contention that there are doctrinal limits to private procedural ordering. I conclude that, although courts have not expressly sanctioned many specific forms of procedural customization, particularly before a dispute arises, the overall trend of doctrine supports procedural innovations.

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II. THE GAINS FROM CUSTOMIZED PROCEDURE

Due to these multiple and moving targets, the optimal design of adjudication may be more roundabout than building a road up a treacherous mountain: at least the mountain stands still.(fn14)

No two disputes look the same. The path to resolving each dispute, then, is unique. That path will vary based on the substantive law implicated-which in a contract dispute depends not only on default contract rules but also on the parties' agreement-the procedural rules applied, the resources each side has and is willing to invest in dispute resolution, each side's estimation of the merits of the dispute, and each side's sensitivity to risk. The kaleidoscopic number of combinations of these interrelated elements defies generalization.(fn15)

Viewing public procedure as primarily comprised of default rather than mandatory rules empowers parties to represent their own interests when confronting an infinitely variable future. Contractible procedure rests not only the content of a dispute but also the process by which a dispute will be resolved on negotiation between the parties. In other words, procedural customization puts the parties in control, allowing them to define the scope of the dispute and to specify the form and substance of the proceedings that will resolve it. Being closer to the unique facts and circumstances surrounding their deal, contracting parties may construct a dispute resolution mechanism that optimally aligns their incentives, reduces expected dispute resolution costs, and mitigates risk.

The following sections explore these benefits in more detail. The first sets the stage by briefly articulating an economic perspective on procedure generally, showing that procedural rules must strike a balance between increased accuracy and increased costs, taking into account the needs of the parties to a dispute as well as the broader society. The second then specifically describes several core features of the current set of procedural rules in public courts. It argues that the default rules of civil procedure achieve this balance, in the main, by relying on standards implemented ex post by...