Customized Procedure in Theory and Reality

Table of ContentsI. Introduction 1867II. The Advantages and Types of Customized Procedure 1875A. Customized Procedure Can Improve Accuracy, Reduce Drafting and Enforcement Costs, and Reveal Information 1876B. The Many (Potential) Forms of Customized Procedure 1881III. Why Don't Parties Exercise Their ProceduralFreedom? 1887A. The Limited Evidence of Procedural Customization 1888B. Efforts to Explain the Rarity of Customized Procedure 18921. Negative Signaling 18932. Contracts and the Product Innovation Cycle 18953. Procedural Contracting Is Too Costly 1897C. The Limits of These Explanations 1900IV. A Closer Look at Commercial Contracts 1905A. The Dataset 1905B. A First Look: Dispute Resolution as a Point in Negotiations 19091. Resolving Disputes Before the Filing of Formal Adversary Proceedings 19102. Changing the Rules of Binding Adjudication 1911C. A More Detailed View: Off-the-Rack and Custom Rules 19141. Choice of Law and Forum: The Preference for New York 19142. Arbitration and the Dominance of the AAA and ICC 19193. Customizing Off-the-Rack Rules 19214. A Closer Look at Arbitration 1925v. Implications 1930A. On Negative Signals and Product Cycles 1932B. Coarse, Not Granular, Procedural Tailoring 1936vi. Conclusion 1942I. IntroductionWhen commercial actors negotiate contracts, they understand that there is some chance of a dispute. Knowing this, their negotiations may encompass not only their primary obligations but also the rules that will govern an adjudication if one should occur. Consider an agreement in which Seller promises to supply a technologically advanced product meeting specifications that Buyer cannot or will not provide in advance.1 Because the product is technically complex and Buyer's needs will not become clear until later, the contract cannot precisely state Seller's obligations.2 But the imprecision increases the risk that, in a dispute over product quality, a court will be unable to detect a breach by Seller.3 The prospect of adjudicator error may diminish Seller's incentives to perform, and Buyer, knowing this to be true, may discount the price it will pay.4 Under these circumstances, both Seller and Buyer should be willing to commit to a more accurate method of adjudication, if one can be found at reasonable cost.5To accomplish this, the parties may modify the background rules of litigation. For example, if they want to avoid the unpredictable, ex post application of choice of law rules, they can specify the governing law in the contract.6 They can agree to arbitrate future disputes if they expect arbitrators to more accurately detect breach.7 If they prefer to go to court, they can specify the forum and waive (or retain) the right to a jury trial.8 Within their chosen forum, they can change the rules allocating costs and attorney fees and can even try to dictate procedure in minute detail. Pleading standards, evidentiary and discovery rules, burdens of proof-all of these are potentially subject to party control.9 Because the possibilities are vast and exist in both litigation and arbitration, I will refer to such modifications generally as "customized adjudication" or "customized procedure."Many observers, from different theoretical perspectives, embrace the possibilities of customized procedure, especially in contracts between sophisticated commercial actors.10 But even in that context, not everyone is ready to concede "[c]ontract law's sovereignty over litigation procedure."11 Enthusiasm for party control is tempered by an equally rich vein of scholarship exploring the limits and normative implications of customized adjudication, especially when parties dictate procedure in public courts.12Yet for all its theoretical richness, this debate may rest on a shaky empirical foundation. Transactional lawyers and their clients, it seems, do not share the enthusiasm for customized procedure. …