Kansas expert on theories behind decisions to arbitrate closes 2010-11 Osler, Hoskin & Harcourt LLP Lecture series

Photo by Bernard Clark Distinguished lecturer Professor Christopher Drahozal of the University of Kansas presents the paper "Why Arbitrate? Substantive versus Procedural Theories of Private Judging."

On February 11, Queen’s Law welcomed Professor Christopher Drahozal of the University of Kansas School of Law as the fifth and final Distinguished Lecturer in Business Law in this year’s Osler, Hoskin & Harcourt LLP series. To a crowd of Queen’s Law students and professors, he delivered a lecture based on his paper “Why Arbitrate? Substantive versus Procedural Theories of Private Judging.”

Drahozal, a highly respected academic in the field of international commercial arbitration, has presented topics on arbitration law and practice throughout North America and Europe. His animated Queen’s presentation discussed the reasons why parties choose to engage in arbitration (private judgment) as opposed to the litigious court system, while highlighting the frequency with which arbitration agreements are commonly used.

“How many of you have a cell phone?” he asked his audience. “How many of you have a credit card? Have bought something off Amazon’s website? Everyone in the room is probably a party to an arbitration agreement, whether you know it or not.”

 Many consumer contracts include arbitration clauses, he continued; they play a key role in commercial transactions. Companies often make use of arbitration clauses in the wording of their business contracts, too. By analyzing and researching a number of business contracts, Drahozal had found empirical evidence to uncover the reasons why companies actively include such arbitration clauses, he said. From that he concluded there are two popular theories that consider why arbitration may be preferred over the court system: procedural efficiency (often touted by lawyers) or substantive decision-making reasons (explained by economists).

 “The ultimate question is this,” said Drahozal: “Are the economists right when they emphasize the substantive decision or are the lawyers more right when they discuss process?”

In order to establish data for his research, Drahozal methodically collected information from the Securities Exchange Commission website and reviewed the cases that chose arbitration. His findings on how arbitration is utilized and the purpose for which it is favoured in contracts allowed him to work backwards to discern the reasons people enter into that process.

His Queen’s presentation highlighted many interesting results supporting the two vying theories. The practical procedural benefits of arbitration, he found, were that it is cheaper, faster, avoids juries, permits parties to choose expert decision-makers, avoids ‘hometown justice,’ and makes awards that are generally easier to enforce.

He also found that the outcome in an arbitration decision can often be substantively different from one found in court. Parties choosing arbitration have more control over the dispute resolution process. They may even be able to dictate who the arbitrator will be and which rules may be applied in the decision-making, thereby allowing these parties to have disputes resolved by use of formalistic trade rules or transnational rather than national laws. By contrast, in court cases all parties need to follow a very set procedure.  

On the other hand, said Drahozal, his research uncovered some reasons why arbitration may not be a beneficial tool. Although arbitration is often touted as a popular alternative dispute resolution mechanism, it is not always appropriate. For some parties, the transaction costs may exceed the benefits. Particularly in situations where high risks are involved (the so-called “bet the company” disputes), the stakes are so high, so extreme, should the party lose, that going to arbitration is too great a risk.

After his lecture, Drahozal answered many questions about the material he had covered and discussed some difficulties found in classifying the many reasons for choosing arbitration into just two stratified streams. Ultimately, there can be no single reason, he concluded, why parties enter into arbitration, for the two procedures often overlap. For example, consumer arbitration clauses are difficult to classify as substantive or procedural because sometimes there are substantive reasons driving the procedural decisions.

Addressing some other questions about his research, he acknowledged that, in practice, arbitration is often drafted without conscious thought (similar to the idea of “path dependency”) and is automatically included as a safe backup (also referred to as a “boilerplate clause”). As a result, sometimes an arbitration’s conclusion can be drawn from a standard clause lacking any conscientious, original thought.

“Professor Drahozal’s lecture was definitely interesting and realistic,” said Sean Miller, Law ’11.  “In commercial law, it seems that arbitration is a very popular but misunderstood tool, and this lecture offered some incredibly practical advice and insight on its benefits.” 

Afterwards, the students and professors joined their guest lecturer in the Law School’s new student lounge for a wine and cheese reception and the opportunity for more informal discussion. 

This lecture closed the 2010-11 Distinguished Lecture series generously sponsored by Osler, Hoskin & Harcourt LLP.  The visitors’ presentations are part of the Osler Business Law Symposium, an advanced seminar course for upper-year students taught by Professor Paul Miller. As they did in the case of Professor Drahozal, students in the corporate law theory class analyze academic papers on contemporary business topics. 

Videos of the entire lecture series are available online at
http://law.queensu.ca/events/oslerDistinguishedLecturesInBusinessLaw.html.
Distinguished lecturers for the 2011-12 series will be announced in September.