• Video

The Role of Arbitration

Most contract disputes do not end up in court. Professor Todd Zywicki explains why private parties usually try to resolve problems amongst themselves, both for personal and professional reasons. Even large corporations or associations like the New York Stock Exchange or professional sports teams rely on professional arbitration to resolve disputes. https://youtube.com/watch?v=D6RxuBZm-0c


So frictions and disappointments happen under contracts all the time. Overwhelmingly most parties resolve that in a voluntary sort of way. Why is that? Well, oftentimes they have an ongoing relationship and I don't want to be the kind of guy who sues you every time you get in trouble. So maybe we get together and we renegotiate the price or the terms of delivery. Maybe I'll take half the shipment now, but I'll take the other half of the shipment in 30 days, because I don't really need it right now. So most problems that might arise parties deal with voluntarily and they deal with just by renegotiating. And this is just basically, because they have repeat dealings for preserving the relationship is more important over time. Parties also perform their promises because they wanna have a good reputation. They want to be known as somebody who doesn't bail out on a contract every time it doesn't turn out the way they want it. They go through with contracts even if in that particular instance, it's not that beneficial to them because they want other parties to trust them. Anybody who has looked at a review on amazon.com or eBay will recognize the value of reputation as a way of keeping these promises. But then sometimes parties can't reach a voluntary resolution or they won't do that. One way you could do that is to go to court. A much more common way, however, is through alternative dispute resolution, in particular arbitration. It's estimated that something like 90% of cross-border transactions, international transactions have mandatory arbitration clauses in them, certain massive markets where there's huge contracts, huge amount of monies, that change hands never appear in court. What's an example? The New York stock exchange, the London stock exchange, commodities markets. These are all situations where if parties have a dispute, they don't take it to court. They've got their own internal dispute resolution mechanisms that are resolved, not by the common law or any statute that result by the rules of the exchange. And so, one of the things that's important to keep in mind is contract law, formal contract law, is just one and in many ways, a relatively small amount of the institutions and governance frameworks that parties develop in society. A good example that might be familiar to a lot of people are sports collective bargaining agreements. If something happens on their collective bargaining agreement, the baseball players and the baseball owners don't sue each other, what do they do? They've got an arbitrator who is an expert in that contract who tries to resolve the dispute between the players and owners by looking at the contract. And because this person knows, has been working with the contract for many, many years, they can really understand the nuance in the ongoing system of relationships that these parties have that no judge or jury would ever be able to understand simply by showing up one day and listening to evidence.

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