We’ll See You in… Court! The Lack of Arbitration Clauses in International Commercial Contracts
75 Pages Posted: 4 Sep 2017 Last revised: 26 Oct 2019
Date Written: December 3, 2018
It is a widely held assumption that sophisticated parties prefer arbitration over litigation in international agreements for three reasons. First, the flexibility granted by arbitration would allow parties to write dispute settlement clauses that are tailored to their individual preferences. Second, concerns for home biases would provide incentives to remove the dispute settlement process from either parties' domestic judicial system. And third, a greater ease of enforcement would cause parties to prefer arbitration over litigation.
This study examines the validity of these theoretical claims, relying on over half a million contracts filed with the SEC between 2000 and 2016. The results suggest that arbitration clauses are less frequently adopted than clauses referring parties to the domestic court system. If they are included, arbitration clauses serve the specific purpose of strategically reducing the discretion granted to the courts enforcing the decision. Absent serious threats to enforcement, parties prefer courts over arbitration, making arbitration a second-best-alternative to a well-functioning domestic judiciary.
Keywords: Contracts, SEC, Arbitration, Forum Selection, International Arbitration, International Business Transactions, IBT, International Commerce, Forum Selection, Drafting
JEL Classification: K12, K41, K33
Suggested Citation: Suggested Citation