Ad hoc or Institutional arbitration: a perspective of an endless debate …..
Arbitration may be defined as “the process by which a dispute or difference between two or more parties as to their mutual legal rights and liabilities is referred to and determined judicially and with binding effect by the application of law by one or more persons (the arbitral tribunal) instead of by a court of law” 1. Arbitration is only an alternative to litigation2 and it does not replace the judicial machinery in all aspects, rather it co-exists with it3.
The object of arbitration is to provide fair and impartial resolution of disputes without causing unnecessary delay or expense and at the same time, it allows freedom to the parties to agree upon the manner in which their disputes should be resolved, subject only to safeguards imposed in public interest4. Today, arbitration is a very popular mode of alternate dispute resolution in the commercial world and one can find an arbitration clause incorporated in the majority of business contracts.
There are two forms of arbitration viz. ad hoc and institutional arbitration. An ad hoc arbitration is one which is not administered by an institution and therefore, the parties are required to determine all aspects of the arbitration viz. number of arbitrators, manner of their appointment, procedure for conducting the arbitration, etc. 5. In contrast, an institutional arbitration is one in which a specialized institution with a permanent character intervenes and assumes the functions of aiding and administering the arbitral process, as provided by the rules of that institution6. It is pertinent to note that these institutions do not arbitrate the dispute, it is the arbitrators who arbitrate, and so the term arbitration institution is inappropriate. Here an analogy can be drawn to a firm of solicitors who engage advocates to argue in the courts but do not appear in court themselves.
Parties are entitled to choose the form of arbitration, which they deem appropriate in the facts and circumstances of their dispute. This necessarily involves the consideration & evaluation of the various features of both forms of arbitration and this can be a daunting task, as both forms have their own merits and demerits.
Ad hoc arbitration
The primary advantage of ad hoc arbitration is flexibility, which enables the parties to decide upon the dispute resolution procedure. This necessarily requires a greater degree of effort, co-operation and expertise of the parties in determination of the arbitration rules. Very often, the parties may misunderstand each other since they are of different nationalities and come from different jurisdictions, and this can delay the arbitration. Also, once a dispute arises, parties tend to disagree and lack of co-operation required may frustrate the parties’ intention of resolving their dispute by ad hoc arbitration.
Such situations can be avoided, if the parties agree that the arbitration should be conducted under certain arbitration rules7. This results in reduced deliberation and legal fees and also facilitates early commencement of the arbitration, as the parties do not engage in the time consuming process of determining complex arbitration rules. There are various sets of rules suitable to ad hoc arbitration, of which the UNCITRAL rules are considered most suitable8.
By reason of its flexibility, ad hoc arbitration is preferred in cases involving state parties who consider that a submission to institutional arbitration devalues their sovereignty9 and they are therefore reluctant to submit to institutional control. Ad hoc arbitration also permits the parties to shape the arbitration in a manner, which enables quick and effective resolution of disputes involving huge sums of public money and public interest.
In the Aminoil10 arbitration, conducted ad hoc, the flexibility permitted the parties to define issues in a manner, which enabled quick resolution of the dispute. Further, the adopted procedure provided that the parties would file their pleadings at the same time. Consequently, neither party was a respondent, a title that parties resent when they believe that they have justifiable claims against the other party. Also, the tribunal directed the state party to lead the case on some issues and Aminoil to lead on other issues, depending on whom the onus of proof laid11.
Another primary advantage of ad hoc arbitration is that it is less expensive than institutional arbitration12. The parties only pay fees of the arbitrators’, lawyers or representatives, and the costs incurred for conducting the arbitration i.e. expenses of the arbitrators, venue charges, etc. They do not have to pay fees to an arbitration institution which, if the amount in dispute is considerable, can be prohibitively expensive. In order to reduce costs, the parties and the arbitrators may agree to conduct arbitration at the offices of the arbitrators. The author participated in one such arbitration on behalf of the claimant, who was financially constrained and that fact was made known to the arbitrator. In order to facilitate the arbitration, the arbitrator proposed that the proceedings be conducted at his office and the parties agreed. This resulted not in considerable reduction in the costs of arbitration but also facilitated the settlement of the dispute. In absence whereof, the claimant would not have been able to afford the arbitration costs and this would have stalled the arbitration. It can be argued that such proposal would not be acceptable to an institution, lest their reputation be tarnished.
In ad hoc arbitration, parties negotiate and settle fees with the arbitrators directly, unlike institutional arbitration wherein the parties pay arbitrators’ fees as stipulated by the institution. This allows them the opportunity of negotiating a reduction in fees. But this involves an uncomfortable discussion & in certain cases, the parties may not be able to negotiate a substantial reduction or for that matter, any reduction at all. The arbitrators are the judges in the cause and no party desires to displease the judge, even before the proceedings have commenced13. Thus, the parties would pay the fees quoted, keeping in mind the high stakes involved14, lest this would lead to a situation aptly described by the phrase “penny wise, but pound foolish”.
One may argue that all ad hoc arbitrations may not be less expensive than institutional arbitration for a number of reasons. Firstly, the parties are required to make arrangements to conduct the arbitration but they may lack the necessary knowledge and expertise. It has been said that many laymen have to participate in arbitration and many arbitrations have to be conducted by persons who are not lawyers15. This would result in misinformed decisions, especially in international commercial arbitration as the parties come from different countries and consequently, in increased costs. Secondly, where there is lack of co-operation between the parties or delay on part of the tribunal in conducting the arbitration or in writing the award16, a party may seek court intervention and the litigation costs negate not only the cost advantage of ad hoc arbitration but also the parties’ intention to arbitrate. Thirdly, the tribunal may, in complex cases involving considerable administrative work, appoint a secretary to administer the arbitration, whose fees will be borne by the parties and this adds to the cost burden of the arbitration17.
It can therefore, be said of ad hoc arbitration that if the required co-operation is forthcoming and the parties are conversant with arbitration procedures or the arbitration is conducted by experienced arbitrators, “the difference between ad hoc and institutional arbitration is like the difference between a tailor-made suit and one that is bought off-the-peg” 18. That is to say, ad hoc arbitration is tailored to the needs of the parties and is more cost effective than institutional arbitration.
In institutional arbitration, the first issue arising for agreement of the parties is choice of the institution, appropriate for the resolution of disputes, arising out of their contract19. Though this may seem a relatively easy task, one can say that it is not. Whilst making such choice, there are various factors to be considered i.e. nature & commercial value of the dispute, rules of the institution as these rules differ20, past record and reputation of the institution and also that the institutional rules are in tune with the latest developments in international commercial arbitration practice21.
A merit of institutional arbitration is that it saves parties and their lawyers the effort of determining the arbitration procedure and also the effort of drafting an arbitration clause, which is provided by the institution22. Once the parties choose the institution, all they need to do is incorporate the draft clause of that institution into their contract. This expresses their intention to arbitrate under the institution’s rules, which provide for every conceivable situation that can arise in an international commercial arbitration. Another merit of the draft clause is that it is revised periodically by the institution, drawing on experience in conducting arbitrations regularly and approved by arbitration experts, taking account of the latest developments in arbitration practice23. This ensures that there is no ambiguity in relation to the arbitration process. On the other hand, ambiguous arbitration clauses in ad hoc arbitration compel parties to seek court intervention in order to commence or continue the arbitration.
Another merit of institutional arbitration relates to selection of the arbitrators. In institutional arbitration, the arbitrators are selected by the parties from the institution’s panel of arbitrators. This panel comprises of expert arbitrators, drawn from the various regions of the world and from across different vocations. This enables selection of arbitrators possessing requisite experience and knowledge to resolve the dispute, thereby facilitating quick and effective resolution of disputes24. Whereas in ad hoc arbitration, the appointment of arbitrators is generally based on the parties’ faith & trust in the arbitrators and not necessarily on the basis of their qualifications and experience. Thus, an incompetent arbitrator may not conduct the proceedings smoothly and this could delay dispute resolution, lead to undesirable litigation and increased costs.
However, it is pertinent to note that the parties do not appoint the arbitrators. They only select and nominate the arbitrators for appointment by the institution, which may refuse to appoint a nominated arbitrator if he lacks the requisite qualifications or impartiality or independence25, in order to avoid its reputation being tarnished26. Consequently, a party whose nominated arbitrator was refused appointment, being dissatisfied, may turn hostile and refuse to participate or attempt to stall the arbitration.
Another merit of institutional arbitration is that the parties and the arbitrators can seek assistance and advice from the institutional staff, responsible for administrating international commercial arbitrations under the institutional rules27. Thus, doubts can be clarified or a deadlock can be resolved without court intervention. Whereas in ad hoc arbitration, the parties would be compelled to approach the Court, in order to take the arbitration forward and consequently, the perceived cost advantage of ad hoc arbitration would be negated by the litigation expenses. Also, the institutional staff constantly monitors the arbitration to ensure that the arbitration is completed and an award is made within reasonable time and without undue delay28.
One of the advantages of arbitration is that it provides for final & binding determination of the dispute between the parties29. In other words, no review or appeal lies against an arbitral award to ensure finality. This involves an inherent risk that mistakes committed by the tribunal cannot be corrected, whereby one party would inevitably suffer. However, some institutional rules provide for scrutiny of the draft award before the final award is issued30 and some provide for a review procedure31. The latter entitles the dissatisfied party to appeal to an arbitral tribunal of second instance32, which can confirm, vary, amend or set aside the first award and such decision in appeal is considered to be final and binding upon the parties33. Contrasting this to ad hoc arbitration where there is no opportunity for appeal or review and the parties have to be prepared to suffer for the mistakes of the arbitrators, this is a redeeming feature of institutional arbitration as it allows the parties a second chance of presenting their case and also permits the rectification of mistakes made by the tribunal of first instance. It also serves as a check on the actions of the arbitrators and restrains them from making arbitrary awards.
It is also perceived that national courts tend to grant enforcement of awards made in institutional arbitration34, though doubts have been raised35, since international arbitration institutions enjoy worldwide recognition and their professional expertise adds to the certainty and finality of the proceedings36. In the Westacre Investments case37, the English court stated that it would uphold an ICC award even over certain breaches of public policy by reason of the undoubted competence of the ICC and the ability of the high calibre arbitrators. Courts are more likely to even enforce an award obtained in default of the other party, which they would refuse had it been obtained in ad hoc arbitration38, in view of the strict arbitration procedures followed by these institutions. To support this view, one can draw analogy to a graduate from an Ivy League university, seeking employment in foreign countries. Now, foreign firms being aware of the excellent academic reputation and stringent assessment standards of such universities would be more likely to employ the student, which they might have not had he graduated from a relatively unknown institution.
Many authors criticise institutional arbitration, as parties need to comply with the procedural requirements, resulting in unnecessary delays in the arbitration. One may argue that such requirements, in fact, avoid delay. For instance, the ICC draws up the terms of reference, criticised as being time consuming and unnecessary, containing provisions to ensure that default of a party does not stall arbitration39. In default of a party in ad hoc arbitration, the other party may seek court intervention to compel the defaulting party to commence or continue the arbitration and this may result in longer delays, than that involved in complying with these procedural requirements, intended to ensure smooth and effective dispute resolution.
It is said that the parties are the masters of the arbitration40 but in institutional arbitration, the institutions virtually acquire certain powers of the parties’ such as appointment of arbitrators, etc. and are in a position to impose their will upon the parties. This seems to be against the very spirit of arbitration and one may say that this is not arbitration in the true sense.
Though ad hoc arbitration would then be preferred, it can be argued that in today’s modern and complex commercial world, ad hoc arbitration is suitable only to disputes involving smaller claims and less affluent parties41 and to domestic arbitrations, excepting where state parties are involved, for the reasons stated hereinabove. One may quote in support thereof that “Whatever its merits in a purely domestic situation, ad hoc arbitration in an international setting frequently frustrates the party seeking to enforce the contract”42 since international commercial arbitrations involve complicated legal issues, which parties coming from different jurisdictions may be unable to deal with.
In the context of international commercial disputes, one may argue that institutional arbitration is more suitable, even though apparently it is more expensive, time consuming and rigid than ad hoc arbitration, keeping in mind the fact that it provides established & updated arbitration rules, support, supervision & monitoring of the arbitration, review of awards and most importantly, strengthens the credibility of the awards.
In conclusion, it is must be said that it is hard to claim that institutional arbitration is superior to ad hoc proceedings or vice versa and one can evaluate the appropriateness only on the facts and circumstances of each case. It is as they say a matter of “horses for courses”.
1. Halsbury’s Laws of England (Butterworths, 4th edition, 1991) para 601,332
2. Freshfields Bruckhaus Deringer, Dispute resolution focus, Autumn 2005
3. Czarnikow v. Roth Schmidt  2 K.B. 478
4. English Arbitration Act 1996, S. 1: Russell on Arbitration (Sweet & Maxwell, 22nd edition, 2003), p. 3
5. Julian D M Lew, Comparative International Commercial Arbitration, (2003), p.34
6. Justice V. N. Khare, Former Chief Justice of India, in his speech at the 38th Annual General Meeting,
Indian Council of Arbitration, January 6 2004
7. Alan Redfern, Law & Practice of International Commercial Arbitration, (Sweet & Maxwell, 4th edition, 2004), p. 50
9. Ibid. p.34
10. Government of Kuwait and Aminoil (1982, 21 International legal materials 976)
11. Alan Redfern, Law & Practice of International Commercial Arbitration, 4th edition, 2004, p. 50
12. Julian D M Lew, Comparative International Commercial Arbitration, 2003, p.35
13. Constantine Partasides, Bernstein’s Handbook of Arbitration & Dispute Resolution Practice, (London:
Sweet & Maxwell, 4th edition by John Tackaberry & Arthur Marriott, 2003), p. 667
15. Lord Wilberforce, Hansard (HL Debates), 18 January 1996, col 777. quoted in Lesotho Highlands
Development Authority v. Impreglio SpA & Ors.  3 W.L.R. 129
16. Austin Amissah, Choice of Arbitration rules – The Dilemma of an African Adviser
17. Alan Redfern, Law & Practice of International Commercial Arbitration, 4th edition, 2004, p. 50
18. Ibid, p. 49
19. Julian D M Lew, Comparative International Commercial Arbitration, 2003, p.35
21. Alan Redfern, Law & Practice of International Commercial Arbitration, 4th edition, 2004, p. 50
22. Julian D M Lew, Comparative International Commercial Arbitration, 2003, p. 171
23. Ibid.: Alan Redfern, Law & Practice of International Commercial Arbitration, 4th edition, 2004, p. 48
24. Julian D M Lew, Comparative International Commercial Arbitration, 2003, p. 232
25. London Court of International Arbitration Rules, Article 7(1)
26. Julian D M Lew, Comparative International Commercial Arbitration, 2003, p. 238
27. Ibid, p. 37
28. Alan Redfern, Law & Practice of International Commercial Arbitration, 4th edition, 2004, p. 48
29. Ibid, p. 406
30. International Chamber of Commerce Arbitration Rules, Art. 27
31. Alan Redfern, Law & Practice of International Commercial Arbitration, 4th edition, 2004, p. 407
32. Grain and Feed Trade Association Rules: Chambre Arbitrale Maritime de Paris Art. XV(3): ICSID
Arbitration Rules, r.50
33. Grain and Feed Trade Association Rules, Art. 12.6
34. Julian D M Lew, Comparative International Commercial Arbitration, 2003, p. 36
35. Ibid, p. 37
36. Justice V. N. Khare, Former Chief Justice of India, in his speech at the 38th Annual General Meeting,
Indian Council of Arbitration, January 6 2004.
37.  3 W.L.R. 770
38. W.W. Park, International Forum Selection (The Hague, Netherlands: Kluwer Law International, 1995), p.70
39. W.L. Craig, W.W. Park and Jan Paulsson, International Chamber of Commerce Arbitration, 3rd edition,
2000. pp. 274-275
40. Pieter Sanders, Arbitration, Chapter 12, Civil Procedure, Vol. XVI of International Encyclopedia Of
Comparative Law, (Mauro Cappelletti Edition, 1996)
41. Robert Carrow, Arbitration
42. W.L. Craig, W.W. Park and Jan Paulsson, International Chamber of Commerce Arbitration, (Oceana Publications, 3rd edition, 1998), para 4.03