Why Arbitrate? Substantive versus Procedural Theories of Private Judging

Abstract

This paper examines why parties agree to arbitrate. Or, more specifically, it examines whether parties agree to arbitrate for procedural reasons or for substantive reasons. Procedural reasons focus on how the arbitral process differs from the litigation process: it may be faster, cheaper, or avoid hometown justice, for example. Substantive reasons focus on the rules of decision in arbitration versus litigation: parties may want a decision maker who applies more formalistic rules than courts would apply or rules (such as transnational law) that are separate from national laws, for example. Of course, parties can agree to arbitrate for both procedural and substantive reasons, and some reasons are difficult to classify as either procedural or substantive. But subject to those important limitations, the available empirical evidence suggests that procedural reasons tend to be more important (for many, although not all, types of contracts) than substantive reasons in explaining why parties agree to arbitrate. One exception is that in some U.S. consumer contracts, businesses use arbitration clauses to reduce the risk of class relief, a reason that might be classified as either substantive or procedural.