Review of Quantitative Finance and Accounting, 22: 219–232, 2004
2004 Kluwer Academic Publishers. Manufactured in The Netherlands.
Forum Selection in International Business Contracts:
Home Bias Portfolio Puzzle and Managerial
MOSHE BAR NIV (BURNOVSKI)
Radziner Law School, The Interdisciplinary Center Herzliya, P.O. Box 167, Herzliya 46150, Israel and School of
Business Administration, Bar Ilan University Tel.: +972-9-952-7220, Fax: +972-9-951-3075
Department of Business Administration, School of Management, Ben-Gurion University of the Negev, P.O. Box
653, Beer-Sheva 84105, Israel Tel.: +972-8-647-2106, Fax: +972-8-647-7691
Abstract. We provide an economic analysis of forum selection in international business contracts. International
business contracts or multi-state transactions within federally structured countries might be subject to more than
one sovereign adjudication system. In case of conﬂict between the transacting parties, the appropriate tribunal must
be identiﬁed. We examine the question of business ﬁrms’ optimal choice of the forums to adjudicate future business
disputes. We extend the investment model approach to litigation by applying a “portfolio theory” type analysis.
We show that ﬁrms that prefer higher expected income and lower income volatility are better off diversifying
the forums under which they litigate business disputes. This stands in contrast to real-world business practice
that consistently shows a clear preference to selecting the “home” court and legal system to settle international
business disputes. In a fraction of the cases, both parties gain by selecting a certain forum, because of specialization
for example, and it becomes optimal to ignore diversiﬁcation. In most cases, however, the relevant factors that
affect forum selection are zero sum and priced ex ante, court bias, for example. Once priced, there is no incentive
to disregard diversiﬁcation. We hypothesize that, in addition to specialization, factors such as managerial moral
hazard explain the real-world behavior of ﬁrms: managers are less likely to be blamed, ex post, for choosing the
“home court.” We suggest that, as international barriers decline and international trade grows, ﬁrms will diversify
the forums in which they adjudicate international business disputes.
Keywords: forum-selection, international-business transactions, contracts, portfolio diversiﬁcation, home bias,
managerial moral hazard, investment approach to litigation, managerial discretion
JEL Classiﬁcation: F29, F39, G11, G39, K49, L19
We provide an economic analysis of forum selection in international business contracts.
Business transactions might be subject to more than one sovereign adjudication system,
especially in the case of international business contracts or multi-state transactions within
federally structured countries like the USA. The multinational (or multi-state) nature of the
deal usually allows for several competent national courts. Private international law rules
determine which of the involved countries’ courts has jurisdiction. However, the transacting