The Flight from Arbitration: An Empirical Study of Ex Ante Arbitration Clauses in the Contracts of Publicly Held Companies

Informed parties bargaining for their mutual advantage will tend to agree to provisions that maximize the social surplus. Such bargaining includes provisions regarding the resolution of disputes that might arise under the contract. Thus, if a form of alternative dispute resolution, such as binding arbitration, provides greater social benefits than litigation, the dynamics of the process should tend to induce the parties to include a clause submitting future disputes to arbitration. This Article studies the actual contracting practices of large, sophisticated actors with respect to arbitration clauses. We examined over 2800 contracts, filed with the Securities Exchange Commission (SEC) in 2002 by public firms, for the presence of contract terms requiring arbitration. Little evidence was found to support the proposition that these parties routinely regard arbitration clauses as efficient or otherwise desirable contract terms. The vast majority of contracts did not require arbitration; only about 11% of the contracts did. Although the results reported here test hypotheses about the frequency of arbitration clause use, the findings do not provide definitive answers as much as they generate more hypotheses. The surprisingly low frequency of arbitration clauses, and their varying frequency across contract types, generate questions about the characteristics of the parties, their contracts, and their attorneys that should be the object of future modeling and research. For now, we interpret our findings as evidence that sophisticated actors prefer litigation to arbitration, encounter obstacles to negotiating mutually satisfactory contract terms that include arbitration clauses, or some combination of these factors