Private dispute resolution

This page lists some private dispute resolution or arbitration services and their historical background.

Dispute resolution as a public good

Law, even more than national defense, appears to be the perfect example of a public good that government simply must supply if order is to exist at all. Law is non-excludable because everyone enjoys its fruits merely by living in society, and it is entirely non-rivalrous, for once the state creates a body of sound legal principles, an unlimited number of people can benefit from them at no additional cost. Public goods theory predicts that private entities cannot provide law, and unless government provides it society cannot prosper. Social contract theorists from Hobbes and Locke to Buchanan and Tullock hold this view.

However, researchers have documented that, despite what Thomas Hobbes and others suggest, numerous examples of polycentric legal orders do exist, and they are not as chaotic as most would assume. Dispute resolution benefits multiple parties, so many consider it a public good. To the extent that these benefits can be internalized, however, the private sector (be it for-profit or not-for-profit) will be capable of providing this public good.

A 2005 survey of Fortune 1,000 companies (the largest U.S. corporations) showed that "79% used arbitration to resolve commercial disputes in the last three years." Thus, one of the central functions of government, business dispute resolution, is largely escaping the state's sphere of influence.

Private arbitration appears to be an attractive substitute for litigation, in part because arbitrators can be selected on the basis of their expertise in matters pertinent to specific disputes. Other potentially important benefits include: (a) arbitration is generally less 'adversarial' than litigation so it is more likely to allow continuation of mutually-beneficial repeated-dealing relationships; (b) if desired, privacy can be maintained; and (c) businessmen may wish to avoid the application of state-made law by agreeing to something in a contract that would be overturned in a government court, since an arbitrator looks to the contract first and the contract can specify the relevant law for deciding a case. (International traders generally assume that national courts will not enforce obligations derived solely from customary commercial law. Indeed, during the medieval period this was particularly true, and as a result, the medieval 'Law Merchant' was an almost pure system of privately-arbitrated customary commercial law backed by private sanctions.)

History

Research details how in primitive societies, law develops gradually from custom in the absence of any sort of government. On occasion, primitive law gradually spreads beyond the narrow confines of a single tribe to encompass a broader community. Early tribal Germanic law, for example, evolved into a more universal legal code in the absence of a central government. The history was similar in ancient Iceland, ancient Ireland, and many other places. By this process primitive law became more civilized, broadening its vision to include anonymous as well as face-to-face societies. To exist and evolve, such systems must have given rule-creating incentives to someone; in other words, at least some of the benefits were not public but exclusive.

History contains many instances of pluralistic legal systems in which multiple sources of law existed in one geographic region. These were much more sophisticated than primitive law. In medieval Europe, for example, canon law, royal law, feudal law, manorial law, mercantile law, and urban law co-existed; none was automatically supreme over the others. Naturally, some jurisdictional conflicts occurred. But this system of concurrent jurisdiction overlapped with a period of economic development (c.1050-1250), not a period of chaos and impoverishment. Apparently these diverse systems did what Thomas Hobbes declared impossible: They created social order and peace in the absence of a distinct, supreme sovereign.

United States

Commercial law was firmly established by the merchant community in Europe (though not by European state governments) centuries before colonies were settled in America. Merchants in America quickly moved to establish their own systems of law and dispute resolution; commercial arbitration was settling disputes in and between the New York and Philadelphia business communities soon after these settlements developed. Commercial law reflected business practice and custom, and its enforcement in America was dominated by private institutions through the eighteenth century.

Merchants wanted to be sure that commercial law would reflect business practice and custom. In addition, resolution of commercial disputes at times had to be achieved after consideration of relatively technical issues. Arbitrators were generally merchants from the relevant merchant community. Thus when technical issues were involved, the disputants used judges who were experts in that particular area of commerce, unlike government court judges who could adjudicate disputes about which they knew nothing. Furthermore, arbitration tended to be relatively speedy and informal. This characteristic is of course desirable to merchants-a dispute had to be settled quickly to minimize disruption of business affairs, and this speed and informality could not have been equitably achieved at the time without arbitration. Merchants avoided state judges and courts because those institutions did not apply commercial law in what the merchant community considered to be a just and expeditious fashion: "Not only did courts, according to one New York merchant, dispense 'expensive endless law'; they were slow to develop legal doctrine that facilitated commercial development".

Around the beginning of the nineteenth century, state courts began to apply the merchants' law as the merchants had established it, and the commercial arbitration system began to disappear. However, the potential for such a system always remained. When the public system became unwilling or unable to adjudicate as the merchant community demanded, commercial arbitration developed again in the United States. Thus there was a significant reemergence of commercial arbitration around the end of the nineteenth century. One factor in the reemergence was clearly the growing problem of court congestion and trial delay, but in addition, "the stronger the regulatory state, the stronger the desire for spheres of voluntary activity beyond its control. The growth of the regulatory state unsettled advocates of commercial autonomy who turned to arbitration as a shield against government intrusion".

The New York Chamber of Commerce established arbitration committees in 1768, and following a period of relative inactivity it evolved into a permanent tribunal just before the end of the century. The main area of rapid redevelopment of commercial arbitration, however, was in the trade associations. Reciprocal benefits within trade associations, backed by the use of boycott sanctions against any member refusing to comply with arbitration, proved sufficient to elicit recognition of legal obligation. By the end of World War I, arbitration was the preferred practice among many of these groups, and it has since "grown to proportions that make the courts secondary recourse in many areas and completely superfluous in others".

The American Arbitration Association (AAA), the largest single group of arbitrators with twenty-five regional offices and 23,000 associates around the country in 1970, helped settle some 22,000 disputes that year. By 1978 the number of disputes settled through the AAA had increased to 48,000. The fact is that since the Association's founding in 1926, entire classes of legal disputes have been removed from the courts altogether. But the growth of AAA activity reflects only a relatively small portion of private sector arbitration. A study conducted in the mid 1950s, for example, found that the AAA conducted only 27 percent of all commercial arbitration. Indeed, the main area of rapid redevelopment of commercial arbitration has continued to be in the trade associations. Statistical information as to the extent of arbitration today by non-AAA affiliates is not available, but by the 1950s it was estimated that almost 75 percent of all commercial disputes were being adjudicated before arbitrators rather than public courts; estimates in 1965 indicated that the use of commercial arbitration was increasing at about 10 percent per year.

Current examples

Another example of private dispute resolution is that facilitated by the VISA corporation. Member banks agree to keep their quarrels within the VISA family when they join the central organization. Anticipating many costly legal disputes between the system's members, the VISA corporation saw an opportunity to invent a cheaper way to resolve disagreements. It created the VISA Arbitration Committee to judge the disputes of the member banks according to VISA's own legal code. The methods are quick, lawyerless, and unbureaucratic. Compared to the slow and costly justice that the banks receive when they have to settle a conflict with a firm outside the VISA camp (and within the reach of the public courts), the VISA banks get a bargain.

A 1994 study reports that about 90 percent of all international trade contracts contain arbitration clauses. Similarly, within the United States, arbitration under the auspices of various commercial organizations, or by independent arbitrators, perhaps from the American Arbitration Association (AAA), resolve at least three times as many commercial disputes as the common law courts do.

Arbitration of disputes between employers (both government and private) and unionized employees has also been routine (and even compulsory for government employees, as well as for some private sector employees, when negotiation proves inadequate) for several decades in the United States. Furthermore, while non-union employees’ disputes were almost never arbitrated before 1970, growing numbers are now resolved by arbitrators. Arbitration is also used for disputes between businesses and customers. For instance, the New York Stock Exchange formally provided for arbitration in its 1817 constitution, and it 'has been working successfully ever since', primarily to rectify disputes between Exchange members and their customers. The Council of Better Business Bureaus (BBB) operates arbitration programs for consumers in many parts of the United States, several automobile manufacturers have contracts with the BBB to arbitrate car owners’ complaints, AAA arbitrators annually resolve thousands of insurance claims, the National Association of Home Builders offers AAA arbitration of buyers’ complaints against association members, medical malpractice arbitration, begun in 1929, is on the rise, and so on. Non-contract civil disputes are also shifting to arbitration in the United States, in part to avoid litigation costs such as delays due to congested government courts. Indeed, a new private-for-profit court industry, developing since 1979, offers a wide variety of ADR procedures to resolve all kinds of disputes (there were more than 50 such firms in the United States 1992, most with offices in several states. These firms are attracting growing numbers of customers (as well as profits and investors, including many who do not contractually stipulate ADR prior to the dispute arising.

Links

• Judgement Day - The Case for Alternative Dispute Resolution by Adam Thierer, 1992