• 18 March 2009

Globalizing Commercial Litigation

Jens Dammann & Henry Hansmann

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The world’s nations vary widely in the quality of their judicial systems. In some jurisdictions, the courts resolve commercial disputes quickly, fairly, and economically.  In others, they’re slow, inefficient, incompetent, biased, or corrupt.  Weak court systems are a particularly conspicuous problem for developing and transitioning economies.  Yet there are striking disparities in the quality of domestic courts even among developed countries.

Effective courts are central to sustained economic development.  An obvious implication is that countries with underperforming courts should reform them.  Yet experience has shown reform to be both difficult and slow, especially where the independence and integrity of the judiciary are in question.

There is, however, an alternative approach to dealing with a dysfunctional court system—one that can go hand in hand with domestic judicial reform.  The law can enable litigants from countries with ineffective judicial systems to have their cases adjudicated in the courts of other nations that have better-functioning judicial systems.  We argue that the case for facilitating this type of extraterritorial litigation is strong.  Extraterritorial litigation, though presently small in volume, could offer considerable benefits if it were more widely available.  And, from a practical standpoint, that availability is increasingly at hand.  A revolution in communications technology, including continuing improvements in the quality and cost of videoconferencing, make it increasingly effective to conduct litigation in remote courts—including courts located across international borders—without requiring that parties, witnesses, or lawyers appear physically before a judge.  Just as New York City residents often use the telephone to obtain assistance with computer software or utility bills from service personnel in Bangalore, India, merchants in Bangalore should soon be able to have their local commercial disputes decided in New York courts via the Internet while they remain at home in Bangalore.

Private arbitration is another alternative to ineffective local courts, and its important role in resolving commercial disputes will surely continue to expand.  Yet, for the foreseeable future, public courts seem destined to play an important role in contract adjudication that arbitration cannot assume—a conclusion strongly supported by recent empirical evidence of the relative rarity of arbitration clauses in important contracts between public corporations in the U.S.  The advantage of well-functioning public courts over private arbitration in contract enforcement seems to derive from the courts’ more principled approach to adjudication.  Broadly speaking, arbitration serves primarily as a means of ex post dispute resolution, seeking to offer an acceptable settlement of a conflict once it has arisen—an approach that tends toward compromised judgments.  Adjudication in (well-functioning) public courts, in contrast, is more focused on holding parties to the contractual commitments they made ex ante, before a conflict arose.  And it is to those commitments that the parties must be able to bond themselves if commercial transactions—and hence economic activity in general—are to develop effectively and efficiently.  Consequently, access to effective public courts is important in commercial contracting, and there are strong advantages to allowing merchants to use foreign courts if their domestic courts are weak.

For extraterritorial litigation to become a feasible alternative in more than just a narrow range of cases, however, it is essential that states be given strong incentives to attract foreign litigants.  At present, the main incentive is to create business for the local bar and other local service providers.  But this approach has obvious drawbacks.  In particular, it drives jurisdictions to force foreign litigants to make extensive use of local lawyers and other local service providers, thereby rendering extraterritorial litigation unattractive for all but very high-stakes cases.  A superior approach is to enable jurisdictions to charge higher court fees for hearing purely foreign cases.  This requires altering norms in many jurisdictions that seem to bar the imposition of higher court fees on foreign litigants than on domestic litigants—norms that effectively force some nations’ litigants to rely on weak courts and thus have the ironic consequence of frustrating rather than furthering true international equality in access to judicial services.

 
I.
Potential Benefits

What are the potential benefits of extraterritorial litigation of commercial contracts, assuming it can be made broadly accessible? The first and most direct benefit is familiar and is frequently mentioned as an argument for allowing choice of forum clauses: litigants from jurisdictions with low-quality courts will be given access to better courts to resolve their disputes.  Important as this is, however, it is not the most important benefit; the advantages of access to better courts extend well beyond those gained by the persons who actually go to court.

The more fundamental advantage of access to better courts is that more effective contract enforcement makes all contractual relationships more dependable, including the overwhelming majority that will never go to court.  Consequently, rapid and principled contract enforcement can transform commercial relationships in general, with broad benefits for the efficiency of economic activity.  Admittedly, countries with poorly functioning court systems will also often do poorly when it comes to enforcing judgments, whether they are domestic or foreign.  Giving litigants access to foreign courts does not solve the problem of inadequate enforcement institutions.  However, a combination of good courts and poor enforcement seems strongly preferable to a combination of bad courts and poor enforcement.

Beyond giving global access to the world’s most effective judicial systems, extensive extraterritorial litigation should improve both judicial systems themselves and the law they administer.  In effect, we are proposing a global market for judicial services in contract litigation.  The resulting competition should—as competition generally does—provide a stimulus to improve the quality of judicial services offered. 

The advantage of freer choice of forum for commercial litigation lies not just in a stimulus for improvement in quality and efficiency generally, but also in the opportunity for more effective comparison between different approaches to adjudication.  For example, it is not completely clear to what extent jury-based systems are superior to non-jury-based systems.  The success in corporate law of the Delaware Chancery Court, which is a court of equity and therefore sits without a jury, suggests one answer.  A large sample of commercial contracts studied by Professors Eisenberg and Miller, in which only 20 percent of litigants waive the right to a jury trial, suggests something different.1  If litigants have broad choice among courts in differing legal systems, it will become far easier to make comparisons between differing approaches to these issues and others and to discover which work best in given circumstances.  That information can then be used not just by litigants in their choice of courts, but also by lawmakers in reforming their judicial systems.

 
II.
Potential Problems

The creation of a global market for judicial services is not without problems.  However, we believe that these are not sufficiently serious to stand in the way of creating a global market.

To begin with, the risk that the parties’ choice of forum will reduce their own combined gains from contracting seems small.  We suggest a global market for judicial services only in those cases where the forum is chosen by mutual agreement between merchants.  The requirement that the choice of forum should be bilateral precludes the plaintiff from choosing a forum that will benefit him at the expense of the defendant.  Moreover, by limiting our approach to merchants, we hope to avoid or at least minimize problems arising from informational asymmetries between the parties.

The more challenging question is whether increased access to foreign courts might produce substantial negative externalities for those who continue to use a country’s domestic courts or—what is effectively the same thing—reduce positive externalities.  Litigation can yield positive externalities of two types.  First, it can improve substantive law through the refinement of precedent.  Second, litigation can benefit the court system by permitting judges to hone their skills.  Extraterritorial litigation shifts those external benefits—at least to begin with—from origin states to host states, threatening to further weaken the legal systems of the origin states.  Will the external benefits conferred on host jurisdictions and their potential litigants be greater than any loss of such external benefits that’s suffered by origin states—and will the overall gains to origin states be substantially positive?  Although a priori analysis cannot be definitive, there are good reasons to believe that the answer to both questions is yes.  The problem of precedent provides an illustration.

Consider first a case for which clear precedent is lacking both in the origin state and in the (potential) foreign host state.  In this situation, beneficial externalities should frequently be greater if the case is tried in the host state.  First, the host state will often be chosen because its courts are particularly competent.  Consequently, the quality of the resulting case law will be particularly high.  Second, the parties will typically choose not just the courts but also the substantive law of the host state.  Given that litigants from many jurisdictions will end up choosing the same law—namely that of the most popular host state—the resulting case law will benefit a particularly large number of economic actors.  Third, a precedent produced within the host state’s law is also available to serve as a guide to origin state courts in addressing similar issues under the origin state’s own law—just as courts from other U.S. states often follow the lead of Delaware’s judiciary when faced with issues of corporate law.

Now consider a case for which clear precedent exists in the (potential) host state but not in the origin state.  If the case is governed by host-state law, it will likely be settled rather than litigated.  If instead the case is governed by origin state law, the resulting uncertainty may result in litigation.  That will involve extra expense for the parties immediately involved, but may also produce precedent valuable to those litigants forced to use origin-state rather than host-state law and courts (for example, because they are not merchants).  To the extent that host-state precedents can serve as a guide to origin-state courts, the tradeoff favors having the case governed by host-state law and courts.  But host-state case law may not always be suited to serve a strong precedent-like function in the origin-state legal system because of differences in the two states’ legal cultures.  And even if they might serve that function well, host-state precedents may, by virtue of their foreignness, have too little salience for judges, lawyers, and individual economic actors in the origin state to guide their actions as clearly as origin-state precedents.  But even in this case, one must set off against such negative externalities the benefits of extraterritorial litigation to those origin state parties who can make use of it.

In sum, though the issue is ultimately an empirical one, good reasons support our belief that the positive externalities of adjudication, much less the effectiveness of the law in general, will be greater with freer access to extraterritorial litigation.

 
III.
Necessary Reforms

For extraterritorial litigation to become widely available, the jurisdiction conferred by contractual choice-of-forum clauses must be respected by the courts in both the host state and the origin state.  Further, host-state judgments must be recognized and enforced in states of origin without substantial delay or cost.  To some extent, this can be accomplished through unilateral action by individual states.  More broadly, nations could pursue these objectives by widely adopting the 2005 Hague Convention on Choice of Court Agreements, and further by amending that Convention to remove its limitation to international cases so that its provisions clearly extend as well to cases that are, except for choice of forum, purely domestic.  At present, however, even the first of these steps—let alone the second—seems politically remote.  Consequently, the more practical route may be for potential host states to negotiate bilateral treaties with potential origin states that provide for mutual recognition of choice-of-forum clauses in commercial contracts and for expeditious enforcement of judgments concerning such contracts that issue from each other’s courts.

Even if the principal legal obstacles to jurisdiction and enforcement are removed, potential host states are unlikely to encourage use of their courts by foreign litigants unless they can render that litigation remunerative.  Since many leading commercial jurisdictions subsidize their courts, this requires that host states be free to charge foreign litigants higher court fees than they charge domestic litigants.  Such a dual fee structure is unusual and runs contrary to the general legal culture in prominent federations of states such as the United States and the European Union.  Yet the alternative to charging higher court fees to foreign litigants is, in practical terms, simply to exclude them from the courts altogether—a result that is as unjust as it is inefficient.

 
IV.
Conclusion

Good courts are central to sustained economic development.  Yet in many jurisdictions around the world, courts are slow, inept, or corrupt.  A promising way of mitigating this problem is to let parties from countries with weak courts litigate commercial disputes in jurisdictions where the courts are much stronger.  Important technological developments, including rapid advances in telecommunications, are creating an environment in which such a global market for judicial services seems entirely feasible.  And there are compelling reasons to believe that the benefits of facilitating the emergence of that market would far outweigh the costs.dingbat

 

Acknowledgments:

Copyright © 2009 Cornell Law Review.

Jens Dammann is Assistant Professor, University of Texas School of Law.

Henry Hansmann is Augustus E. Lines Professor of Law, Yale Law School.

This Editorial is based on the following full-length Article: Jens Dammann & Henry Hansmann, Globalizing Commercial Litigation, 94 CORNELL L. REV. 1 (2008).
Click Here for the Full Article

  1. Theodore Eisenberg & Geoffrey P. Miller, Do Juries Add Value?: Evidence from an Empirical Study of Jury Trial Waiver Clauses in Large Corporate Contracts, 4 J. EMPIRICAL LEGAL STUD. 539 (2007) (examining a sample of 2,816 contracts filed with the SEC as exhibits in Form 8-K filings).

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