Unbundling Procedure: Carve-Outs from Arbitration Clauses

A rich literature analyzes how parties choose between courts and arbitration. Within this literature, scholars traditionally assume that sophisticated parties make a single choice between courts and arbitration based on the bundle of dispute resolution services that seems most appealing ex ante. As with the literature on bundling generally, however, legal scholars are increasingly focusing their attention on the unbundling of court and arbitral procedures―that is, the ability of parties to contract for à la carte or customized dispute resolution procedures in court and arbitration. While such unbundling is common ex post, i.e., after a dispute arises, most of the scholarly attention has focused on ex ante unbundling of procedures. Unfortunately, this burgeoning theoretical literature faces a difficult empirical reality: the available empirical evidence reveals surprisingly little use of customized procedural rules in contracts between sophisticated parties. Parties appear only rarely to agree to unbundle dispute resolution procedures ex ante. This Article argues that ex ante procedural unbundling does occur, but through unbundling by claim and remedy rather than through à la carte choice of individual procedures. In a wide variety of contracts, parties routinely unbundle the procedures governing their anticipated disputes, deciding to pursue some claims and remedies in court and others in arbitration. By unbundling claims and remedies in this manner, parties can obtain greater performance incentives and lower dispute resolution costs without facing the prospect of prohibitively expensive specification costs. Claim and remedy unbundling, through contractual carve-outs and carve-ins, enables parties to separate governing procedures based on the nature of the specific risks of nonperformance. For most parties, less perfectly crafted off-the rack rules applied on the basis of carefully tailored claims appear preferable to more carefully tailored procedural rules that must then apply to all possible disputes. The prevalence of unbundling by carve-outs in contracts involving sophisticated parties has policy implications for courts’ treatment of unconscionability and nonarbitrability questions that arise in the context of enforcing arbitration clauses. Moreover, to ensure that local courts provide value to commercial parties, governments should focus on the substantive rules and procedures applied to claims that function to protect information, innovation, reputation, and property