Carve-Outs and Contractual Procedure

48 Pages Posted: 16 Jun 2013 Last revised: 25 Jun 2013

See all articles by Erin A. O'Hara O'Connor

Erin A. O'Hara O'Connor

Florida State University - College of Law; Gruter Institute for Law and Behavioral Research

Christopher R. Drahozal

University of Kansas School of Law

Date Written: June 14, 2013

Abstract

The burgeoning literature on private contractual choice of procedure has run up against a difficult empirical reality: the available empirical evidence reveals surprisingly little use of customized procedural rules in contracts between sophisticated parties. One likely reason for so little customization is that contractual relationships entail multiple risks, and it is very difficult to specify customized procedures that would optimally handle all potential disputes. In this article, we identify and analyze an alternative mechanism by which procedural customization commonly takes place in contracts: the use of carve-outs from arbitration. A carve-out is a contract provision by which the parties exclude (or carve out) certain claims or remedies from their arbitration clause. Carve-outs are a mechanism by which parties choose between court and arbitral bundles of procedures on a claim-by-claim basis. The claim-based choice makes more sense in that it enables the parties to choose procedures tailored to individual contractual risks. With such clauses, parties are able to obtain a more carefully calibrated procedural customization than provided by an arbitration clause or forum selection clause alone, but at a much lower overall cost than they would incur by attempting to develop customized procedural rules. This article sets out a model of the decision to use carve-outs and provides a detailed empirical examination of their use. Our analysis has a number of implications for the continued necessity of courts and their governing legal rules, the legal enforceability of carve-outs, and court treatment of the severability of claims from arbitration clauses more generally.

Keywords: Contracts, Arbitration, Carve-Outs, Contractual Procedure

JEL Classification: K12, K40, K41

Suggested Citation

O'Hara O'Connor, Erin A. and Drahozal, Christopher R., Carve-Outs and Contractual Procedure (June 14, 2013). Vanderbilt Law and Economics Research Paper No. 13-16; Vanderbilt Public Law Research Paper No. 13-29. Available at SSRN: https://ssrn.com/abstract=2279520 or http://dx.doi.org/10.2139/ssrn.2279520

Erin A. O'Hara O'Connor

Florida State University - College of Law ( email )

425 W. Jefferson Street
Tallahassee, FL 32306
United States

HOME PAGE: http://www.law.fsu.edu/our-faculty/deans/ohara-oconnor

Gruter Institute for Law and Behavioral Research

158 Goya Road
Portola Valley, CA 94028
United States

Christopher R. Drahozal (Contact Author)

University of Kansas School of Law ( email )

Green Hall
1535 W. 15th Street
Lawrence, KS 66045-7577
United States
785-864-9239 (Phone)
785-864-5054 (Fax)

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