International Business Contracts Research Articles

Forum Selection in International Business Contracts: Home Bias Portfolio Puzzle and Managerial Moral Hazard

We provide an economic analysis of forum selection in international business contracts. International business contracts or multi-state transactions within federally structured countries might be subject to more than one sovereign adjudication system. In case of conflict between the transacting parties, the appropriate tribunal must be identified. We examine the question of business firms' optimal choice of the forums to adjudicate future business disputes. We extend the investment model approach to litigation, by applying a Portfolio Theory type analysis. We show that firms that prefer higher expected income and lower income volatility are better off diversifying the forums under which they litigate business disputes. This stands in contrast to real-world business practice that consistently shows a clear preference to selecting the home court and legal system to settle international business disputes. In a fraction of the cases, both parties gain by selecting a certain forum, because of specialization for example, and it becomes optimal to ignore diversification. In most cases, however, the relevant factors that affect forum selection are zero sum and priced ex ante. Court bias, for example. Once priced, there is no incentive to disregard diversification. We hypothesize that several factors such as managerial moral hazard explain the real world behavior of firms: managers are less likely to be blamed, ex post, for choosing the home court. We suggest that, as international barriers decline and international trade grows, firms will diversify the forums in which they adjudicate international business disputes. Key Words: forum-selection, international-business transactions, contracts, portfolio diversification, home bias, managerial moral hazard, investment approach to litigation, managerial discretion

The Arbitration Agreement under the Swedish 1999 Arbitration Act and the German 1998 Arbitration Act

IT IS commonplace that arbitration is consensual. It is also commonplace that every arbitration is only as good as the arbitration agreement on which it is based. In practice, however, parties to international business contracts do not devote the necessary attention to the drafting of the arbitration agreement. They dispel the thought that their excellent business atmosphere might ultimately end up in an arbitration. Instead, they ‘just hope for the best’.1 This natural conflict between the psychological situation at the moment of the drafting of an arbitration agreement and the role of that agreement as the basis of the arbitral process reveals the significance of the rules of the applicable arbitration law dealing with the substantive and formal validity of the arbitration agreement. The 1999 Swedish Arbitration Act and the 1998 German Arbitration Act both contain detailed provisions on the arbitration agreement. A comparative study of the similarities and diversities of these rules is particularly valuable for two reasons. First, these two Acts, together with the English Arbitration Act 1996, are the most modern arbitration laws in force in Europe at the moment. Secondly, both legislatures have taken completely different approaches to the drafting of their new Acts. Germany had long since been avoided as the seat for international arbitrations due to its outmoded arbitration law dating back to 1877. To do away with this deplorable situation, the German legislature adopted the UNCITRAL Model Law on International Commercial Arbitration.2 The Swedish legislature, like many other countries with a long-standing record as an attractive location for international arbitrations, decided to pursue a different approach in order to obtain the best of both worlds. While taking account of the Model Law and other recent developments in arbitral practice and legislation, it drew upon the positive experiences with previous practice and …

An Introduction to the New German Arbitration Act Based on the UNCITRAL Model Law

A FUNDAMENTAL and radical change of the arbitration law in Germany is taking place in 1998. The Tenth Book of the Code of Civil Procedure (ZPO) which has contained the German arbitration law since the coming into force of the ZPO as long ago as 1879, is being fully replaced by a new text based on the UNCITRAL Model Law on International Commercial Arbitration. Thus, after the institutional framework for national and international arbitration in Germany has been newly shaped in 1992 by the concentration of the former institutions at the Federal level within the German Institution of Arbitration ( Deutsche Institution fur Schiedsgerichtsbarkeit, DIS),1 the legal framework for national and international arbitration in Germany is now modernized into an internationally co-ordinated form. This is of high relevance and practical importance in a country which has a long tradition of arbitration and where today arbitration is used widely in the practice of industry and commerce in their business relations and contracts both to other German enterprises as well as to private and public enterprises in foreign states. Germany being one of the major participants in international commerce and investment, this preference of German enterprises for arbitration specifically in their international business relations and contracts has led to thousands of arbitration agreements and clauses being concluded by German enterprises every year. But this has not led to a great number of international arbitration proceedings in Germany itself. The usual practice in international business relations being that the place of arbitration is chosen not to be in the home state of either party, these arbitrations involving German enterprises led normally to places of arbitration outside Germany. On the other hand, in spite of the long arbitration tradition and the preference for arbitration in Germany, foreign enterprises did not develop a preference for …

The Incentive to Sue: An Option-Pricing Approach

Previous articleNext article No AccessThe Incentive to Sue: An Option-Pricing ApproachBradford CornellBradford Cornell Search for more articles by this author PDFPDF PLUS Add to favoritesDownload CitationTrack CitationsPermissionsReprints Share onFacebookTwitterLinkedInRedditEmail SectionsMoreDetailsFiguresReferencesCited by The Journal of Legal Studies Volume 19, Number 1Jan., 1990 Sponsored by The University of Chicago Law School Article DOIhttps://doi.org/10.1086/467846 Views: 8Total views on this site Citations: 19Citations are reported from Crossref Copyright 1990 The University of ChicagoPDF download Crossref reports the following articles citing this article:Julia Shamir, Noam Shamir Third-party funding in a sequential litigation process, European Journal of Law and Economics 52, no.11 (Aug 2021): 169–202.https://doi.org/10.1007/s10657-021-09707-4Samuel Antill, Steven R. Grenadier Financing the Litigation Arms Race, SSRN Electronic Journal 15 (Jan 2020).https://doi.org/10.2139/ssrn.3719238Michael I. C. Nwogugu Intangibles Accounting Regulations and the “Global Intangibles Economy”: Belief-Revision, Enforcement Theory and Financial Stability, (Sep 2019): 341–420.https://doi.org/10.1057/978-1-137-44704-3_5 References, (Nov 2016): 239–280.https://doi.org/10.1201/9781315383149-16William H.J. Hubbard Sinking Costs to Force or Deter Settlement, Journal of Law, Economics, and Organization 32, no.33 (Dec 2015): 545–585.https://doi.org/10.1093/jleo/ewv029Bruce H. Kobayashi The Law and Economics of Litigation, SSRN Electronic Journal (Jan 2015).https://doi.org/10.2139/ssrn.2613145Martin Mendelski, Alexander Libman Demand for litigation in the absence of traditions of rule of law: an example of Ottoman and Habsburg legacies in Romania, Constitutional Political Economy 25, no.22 (Feb 2014): 177–206.https://doi.org/10.1007/s10602-014-9158-yMartin Mendelski, Alexander Libman Demand for Litigation in the Absence of Traditions of Rule of Law: An Example of Ottoman and Habsburg Legacies in Romania, SSRN Electronic Journal (Jan 2014).https://doi.org/10.2139/ssrn.2429309James Fallows Tierney Economic Theory of Bellwether Trials, SSRN Electronic Journal (Jan 2011).https://doi.org/10.2139/ssrn.1754231Avery W. Katz, Chris William Sanchirico Fee Shifting in Litigation: Survey and Assessment, SSRN Electronic Journal (Jan 2010).https://doi.org/10.2139/ssrn.1714089Ansley Chua, Bruce Haslem PSLRA and Litigation Backed Investor Speculation, SSRN Electronic Journal (Jan 2008).https://doi.org/10.2139/ssrn.1099050BRUCE HASLEM Managerial Opportunism during Corporate Litigation, The Journal of Finance 60, no.44 (Aug 2005): 2013–2041.https://doi.org/10.1111/j.1540-6261.2005.00786.xBarry E. Cushing, David L. Gilbertson Strategic Analysis of Securities Litigation against Independent Auditors, AUDITING: A Journal of Practice & Theory 21, no.22 (Sep 2002): 57–80.https://doi.org/10.2308/aud.2002.21.2.57Lucian Arye Bebchuk Suits with Negative Expected Value, (Jan 2002): 1951–1954.https://doi.org/10.1007/978-1-349-74173-1_368Moshe Bar Niv (Burnovski), David Feldman Forum Selection in International Business Contracts: Home Bias Portfolio Puzzle and Managerial Moral Hazard, SSRN Electronic Journal (Jan 2001).https://doi.org/10.2139/ssrn.291339Peter Newman S, (Jan 1998): 395–559.https://doi.org/10.1007/978-1-349-14286-6_4Avery Wiener Katz Indemnity of Legal Fees, SSRN Electronic Journal (Jan 1998).https://doi.org/10.2139/ssrn.57958 William M. Landes Sequential versus Unitary Trials: An Economic Analysis, The Journal of Legal Studies 22, no.11 (Oct 2015): 99–134.https://doi.org/10.1086/468159Frank A. Sloan, Thomas J. Hoerger Uncertainty, information and resolution of medical malpractice disputes, Journal of Risk and Uncertainty 4, no.44 (Dec 1991): 403–423.https://doi.org/10.1007/BF00056164