The Privatization of Business and Commercial Dispute Resolution: A Misguided Policy Decision
59 Pages Posted: 8 May 2002
The common law, and how it develops rules for allocating risk and deciding business and commercial disputes through a body of reported decisions, has provided a framework for governing commercial trade and commerce that has served business well over the years.
Recent empirical research by scholars at Harvard University and the University of Chicago (La Porta, Lopez-de-Silanes, Shleifler and Vishny) has found that legal systems do, in fact, matter. Stated differently, their research credits the common law legal system as a significant reason why certain countries develop at a more advanced rate than, for example, civil law countries.
It is therefore ironic that the resolution of business and commercial disputes in a prominent common law country such as the United States is becoming more and more "privatized," thereby stunting the development and growth of the very body of common law that has traditionally served business so well.
This article points out that this "privatization process" is occurring at a number of levels and through a variety of mechanisms:
First, and most obvious, businesses are voluntarily exiting the public court system and making increased use of private ADR to resolve their disputes. Yet, the evidence is mixed as to whether private ADR is, in fact, cheaper, faster, entails more just decisions than what juries can offer, etc.
Second, "managerial judging" has arrived where, for example, our own courts are diverting important business and commercial disputes into some form ADR (often against the will of the parties) in order to clear dockets and conserve judicial resources for non-business cases. Relatedly, our own courts are making increased use of such tools as vacatur, selective publication and the related adoption of no-citation rules, depublication, filings under seal and confidential protective orders, thereby further diminishing the development of our common body of commercial law.
Third, changes in the institutional practice of law itself are taking place -- namely, the advent of what we call the "discovery lawyer" at many corporate law firms. These firms are elite institutions that attract our most talented graduates, have the most powerful clients, possess the greatest clout within the profession and exert a disproportionate influence over the practice of law and development of our body of commercial law. Yet such firms (and the way they are structured) and such lawyers (and the way they are trained and mentored) drive up legal fees, thereby further frustrating business owners and giving them yet another reason to exit the public court system and take their commercial disputes to private ADR.
Standing alone, none of these developments or levels of privatization may be cause for concern. However, we argue that the cumulative effect of these privatization processes has serious consequences for the future development of our body of commercial common law. For example, the continued vitality of the very legal system that La Porta, Lopez-de-Silanes, Shleifler and Vishny point out has been so beneficial to the business community may be in jeopardy. Further, the development of our contemporary body of commercial common law based on many courts' experiences with similar business cases and the evolution of a set of rules that might have helped prevent such disputes from occurring in the first place is significantly thwarted. There is also a loss of important information to the public and the gap between the "haves" and "have-nots" in business is further widened.
What can and should we do about it? This article concludes by pointing out that with several course corrections designed to: (1) help maintain a sufficient quantity and variety of business cases at the trial court level; and (2) help increase the use and availability of appellate decisions - courts and the common law in the 21st century can play a more important and effective role in regulating and evolving our business and commercial lives.
Keywords: Common law, legal systems, common law legal system, civil law legal system, precedent, stare decisis, alternative dispute resolution, ADR, arbitration, mediation, negotiation, managerial judging, bureaucratization of the judiciary, vacatur, selective publication, no-citations rules, depublication, filings under seal, confidential settlements, discovery lawyer
JEL Classification: K1, K2, K3, K4, G3
Suggested Citation: Suggested Citation