Part 2

(Copyright by the author, 2007.)

With the advent of the internet, I believe that arbitration is now practical for ordinary contracts between domestic businesses and between businesses and their customers.  If internet-based arbitration succeeds, moreover, it is likely that corruption in the courts will be ameliorated as the courts respond to the competition. 

Recent experience suggests that the internet now makes arbitration possible at a lower cost and at greater speed than ever before, and frees it from dependence upon judicial enforcement of arbitral awards.  The Internet Corporation for the Assignment of Names and Numbers (ICANN) forces domain name holders to agree to abide by the terms of the Uniform Domain Name Dispute Resolution Policy (UDRP).  Disputes under the UDRP are handled by one of four dispute resolution providers approved by ICANN, as chosen by the complaining party.  Enforcement works because ICANN controls the registrars, which, in turn, assign domain names.  Because the process does not require the parties or the panelists to travel and because it moves quickly, it is very inexpensive.  The two dispute resolution providers with the greatest volume of cases charge between $1,300 and $5,000 to resolve most complaints.

Credit card issuers maintain a type of dispute resolution system as well.  If a customer disputes a charge to a credit card and the merchant does not provide a means of identifying the cardholder, such as a signature, then the issuer may charge the transaction back to the merchant.  Neither the merchant nor the cardholder is charged a fee for this dispute resolution service.

The ICANN and the credit card systems face no problem of enforcement because the decision maker effectively controls the stakes.  A company called SquareTrade, in contrast, encourages compliance though reputational effects.  A mediation service for eBay users and other customers, SquareTrade offers a program in which sellers on eBay can agree to abide by certain practices, and in exchange, they may display the SquareTrade seal on their website and auction pages, signaling to consumers that it is likely to deal fairly.

Of course, an arbitration system for the enforcement of ordinary contracts between businesses and between businesses and their customers would face additional hurdles because the initial contracting does not occur online and the contracting parties would not be dependent upon the arbitrator for continuing access to business opportunities.  Those obstacles likely can be overcome, however, by creative use of the internet.

In a place where the courts are not reliable, parties to a potential transaction have an incentive to contract around the problem and provide for arbitration, particularly if the arbitration service they specify is both cheap and fast.  The internet makes all this possible.  Indeed, there are now a host of web-based dispute resolution services in operation. As for ensuring that a party will abide by an award rendered against it, this can be overcome by maximizing the reputational effect of noncompliance. 

First, the arbitrator must set certain conditions upon the availability of its service, designed to enhance the cost of noncompliance.  This is easier with businesses that deal with the public.  Following the example set by Better Business Bureaus many decades ago, the arbitrator must require the subscriber to publicize its adherence to the arbitral system, along with the system’s web address.  This should not be a problem because the subscribing business wants to use its agreement to arbitrate as a selling point.  The arbitrator must also give potential purchasers free access to current information on the subscribers’ record of compliance by posting this information on its website.

In sum, by building upon the experience of existing web-based dispute resolution systems and by maximizing the reputational cost of noncompliance with an arbitral award, it should now be possible to provide cheap, fast, and most important, effectively binding arbitration in places where the rule of law does not prevail in the courts of law. 

If this is possible, why has not someone already done it?  I am not sure the service can be provided at a profit sufficient to attract entrepreneurs to provide it in developing countries.  If true, however, the service could be sponsored either by one or more of the many organizations that are pouring money into judicial reform with little to show for it.

The resolution of disputes is a public good insofar as decisions generate precedents by which nonparties may be guided.  In a country with a nonviable court system, however, even an arbitral service that does not generate precedents would provide a public good insofar as its competition causes the public system to reform itself.

By Douglas H. Ginsburg

Chief Judge, U.S. Court of Appeals, Washington, DC and Distinguished Professor of Law, George Mason University.