Institutional Arbitration v. Ad hoc Arbitration

Introduction

Arbitration could also be defined as a process during which two or more parties settle their disputes on their legal rights and liabilities by referring the dispute to a specific person (the arbitrator), who decides the dispute with a binding effect and by applying the law, rather than the parties getting to the Court of law. Arbitration is an alternate process of solving disputes, and hence, it coexists with the system of litigation. the most objective of getting an arbitration proceeding is to unravel the dispute as fast as possible, which also features a binding effect, without getting to the Court of law and getting engaged within the long-drawn judicial procedure. In India, the choice method of solving disputes has been present for an extended time, since trade and commerce began to grow outside the country.

Following much inducement from various bodies, in 1996, the govt introduced the Arbitration and Conciliation Act, 1996, which was supported by the United Nations Commission on International Trade Law (UNCITRAL) Model Law. This ensured that there was a particular level of uniformity within the law. After this Act had been introduced, it restricted the situations during which the disputing parties could approach the Court and therefore the Act also provided genuine and bonafide powers to Arbitrational Tribunals.

Coming to the concept of Arbitration within the Indian businessmen, people relied upon and put their faith in the unplanned sort of arbitration, and therefore the concept of institutional arbitration is comparatively new to the Indian community.

Types of Arbitration Procedures

There are two main sorts of arbitration procedures –

• Ad- Hoc Arbitration
• Institutional Arbitration

Ad-Hoc Arbitration

Ad-Hoc Arbitration is often defined as a procedure of arbitration where a tribunal disputed parties will close and conduct arbitration between the parties, following the principles which are agreed by the party beforehand or by following the principles which are laid down by the tribunal, just in case the parties don’t have an agreement between them[i]. However, there are not any hard and fast rules, as different parties may prefer to follow different rules, as an example, the principles laid by the union to which the disputing parties belong.

One peculiarity regarding the method of ad-hoc arbitration is that the disputing parties would choose arbitrators of their own choice, then those arbitrators would appoint another arbitrator by deciding among themselves. For the sake of convenience, these arbitrators would appoint the presiding arbitrator, who is senior to both of them. Many parties like better to choose retired judges of the High Courts or the Supreme Courts because the presiding arbitrator, keeping various factors in mind just like the quantum of the claim, the complexity of the dispute, etc.

Advantages of Ad-hoc Arbitration

A properly structured unplanned arbitration should be more cost-effective, and thus better suited to smaller claims and fewer wealthy parties. The unplanned process places a heavier burden on the arbitrator to arrange and administer the arbitration. a definite disadvantage of the unplanned process is that its effectiveness depends on how willing the parties are to agree on the arbitration procedures at a time when there may already be a dispute. The failure of 1 or both parties to completely cooperate may result in time spent resolving issues or an ultimate recourse to the court. A primary advantage of the unplanned process is its flexibility, enabling the parties to make a decision on the dispute resolution procedure themselves.  However, this may in fact require a greater degree of effort, cooperation and expertise from the parties to work out the arbitration rules. Often the parties may misunderstand one another if they’re different nationalities and are available from different jurisdictions, and this will cause delays. Again, once a dispute has arisen this might frustrate the parties’ intention to resolve the dispute on a billboard hoc basis[ii].

The arbitrator’s fees are going to be negotiated directly between the parties and therefore the arbitrators, allowing them the choice to barter, whereas in institutional arbitration the arbitrators’ fees are going to be set by the institution. The disadvantage here is that this will involve an uncomfortable discussion and, in certain cases, the parties might not be ready to negotiate a fee reduction. The arbitrators are the ‘judges’ within the case and no party would want to upset the judge, particularly before the proceedings have even commenced.

Disadvantages of Ad-hoc Arbitration

Parties wishing to incorporate a billboard hoc article within the underlying contract between them, or seeking to agree on the terms of arbitration after a dispute has arisen, have the choice of negotiating an entire set of rules which meet their needs. However, this approach can require considerable time, attention, and expense with no guarantee that the terms eventually agreed will address all eventualities. Furthermore, if parties haven’t agreed on arbitration terms before any dispute arises they’re unlikely to completely cooperate in doing so once a dispute has arisen.

As we’ve seen, bodies like UNICITRAL have rules available which are designed specifically for unplanned proceedings. Other options available to parties wishing to proceed during this way, who aren’t in need of rules drawn specifically for them, include:

• using or adapting a group of institutional rules like the ICC Rules of Arbitration
• incorporating statutory procedures, like the English Arbitration Act of 1996;
• adopting a billboard hoc provision from another contract.

These options all carry certain risks. for instance, where rules involved by an institutional provider are incorporated into unplanned proceedings existing provisions that require administration by the provider – like making appointments – will get to be amended or excluded. This runs the danger of making ambiguities, or of the parties unintentionally creating an institutional process.

Why use Ad-hoc arbitration?

 Ad hoc arbitration allows the parties to tailor the arbitration process to the precise circumstances of their dispute. A successful unplanned arbitration often depends on the skill and knowledge of the attorneys and arbitrators involved. Our attorneys have successfully represented clients across the planet in numerous international unplanned arbitration proceedings.

How ad-hoc arbitration works?

It’s largely up to the parties involved. Once they need agreed on unplanned arbitration (as against institutional arbitration), the parties choose.

Institutional Arbitration

With the expansion of the economy, trade, and commerce developed. This was true for the Indian market also. With the enlargement of the economy and investment into the Indian market by the foreign investors, demand for institutional arbitration shot up suddenly. Despite the rising demand for institutional arbitration, the expansion of institutional arbitration procedures has been slow.

But in recent times, prestigious institutional arbitration association just like the London Court of International Arbitration, The Permanent Court of Arbitration and therefore the International Chamber of Commerce have opened Centres in India. this might be seen as a really positive sign because these institutes are very well-known and prestigious and wouldn’t have opened Centres in India if they didn’t see a possible growth in Institutional arbitration.

In the case of Institutional Arbitration, the disputing parties submit their issue to an establishment that has been designated to administer the arbitrational process. The institution then arbitrates the dispute consistent with the principles laid by them ahead of the parties. Although, the dispute isn’t arbitrated by the institution. The institute selects a panel that administers the entire process.

All the institutes don’t provide an equivalent sort of service. Some institute just provides the rules and therefore the rules on which the procedure are going to be based (London Maritime Arbitration Association). Others provide a roster of arbitrators to the parties but don’t appoint the arbitrators themselves (Society of Maritime Arbitrators in New York).

Certain institutions administer the entire process of arbitration (International Court of Arbitration of the International Chamber of Commerce).

Advantages of Institutional Arbitration

For those that can afford institutional arbitration, the foremost important advantages are:

• the availability of pre-established rules and procedures which make sure the arbitration proceedings
• begin during a timely manner
• administrative assistance from the institution, which can provide a secretariat or court of arbitration.
• a list of qualified arbitrators to settle on from
• assistance in encouraging reluctant parties to proceed with arbitration; and
• an established format with a proven record.

Institutional arbitration saves parties and their lawyers the trouble of determining the arbitration procedure and of drafting an article, which is provided by the institution. Once the parties have selected an establishment, they will incorporate that institution’s draft clause into their contract. An arbitration clause is often amended from time to time by the institution, drawing on experience in conducting arbitrations regularly, and ensures there’s no ambiguity in reference to the arbitration process[iii].

An institution’s panel of arbitrators will usually be made from experts from various regions of the planet and include many various vocations. this enables parties to pick an arbitrator possessing the required skill, experience, and expertise to supply a fast and effective dispute resolution process. It should be noted, however, that the parties merely nominate an arbitrator – it’s up to the institution to form a meeting and therefore the institution is liberal to refuse a meeting if it considers that the nominated arbitrator lacks the required competence or impartiality. An extra advantage of institutional arbitration is that the parties and arbitrators can seek assistance and advice from institutional staff. during a less formal unplanned arrangement, parties to the arbitration would need to approach the court so as to require the arbitration forward and this is able to inevitably incur further expenditure.

One of the perceived advantages of arbitration generally is that it provides a final and binding award that can’t be appealed. However, there’s an inherent risk that an error made by a tribunal couldn’t be rectified at a later stage. To counterbalance this risk, some institutional rules provide for scrutiny of the draft award before the ultimate award is issued. A dis-satisfied party could then appeal to an arbitral tribunal of the second instance which might be ready to confirm, vary, amend or put aside the draft award. Less formal processes provide no such option.

Disadvantages of Institutional Arbitration

• The principal hazards of institutional arbitration are:
  administrative charges for offerings and use of the facilities, which can be extensive if there is a massive amount in dispute – sometimes, extra than the authentic quantity in dispute;
• bureaucracy from within the institution, which can lead to delays and extra costs;
• the events can also be required to reply inside unrealistic time frames

Both institutional and ad hoc arbitration have strengths. Institutional arbitration is a performed underneath a standing set of procedural policies and supervised via professional staff. As a practical matter, this reduces the risks of procedural breakdowns, mainly at the commencing of the arbitral process, and of technical defects in the arbitration lawsuits and award. The institution’s involvement can be particularly constructive in the appointment of arbitrators, challenges to arbitrators, selection of an arbitral seat and fixing of arbitrator’s expenses where specialized team of workers furnish better provider than advert hoc choices by national courts with little ride in such matters. Equally important, many provisions concerning competence-competence, reparability, provisional measures, disclosure, arbitrator impartiality, corrections and challenges to awards, alternative of arbitrators and costs.

On the different hand, advert hoc arbitration is arguably extra bendy and doubtlessly more confidential than institutional arbitration. Moreover, the growing measurement and sophistication of the worldwide arbitration bar and the efficacy of prison regimes for arbitration arguably reduces the blessings of institutional arbitration

In reality, an ad hoc arbitration may additionally not prove to be much less pricey than the institutional process. Firstly, the events are required to make arrangements to behavior the arbitration however they might also lack the essential expertise and expertise. Arbitrations are typically conducted through humans who are not legal professionals – however, this can also end result in misinformed choices especially in international industrial arbitration.
Secondly, where there is lack of cooperation between the events or delay on the section of the tribunal conducting the arbitration or writing the award, a party may additionally want to are seeking courtroom intervention. Litigation fees would no longer solely negate the price advantages of advert hoc arbitration, but additionally the parties’ intention to keep away from the courts via alternative dispute resolution methods[iv].

Lastly, in complex instances the tribunal might also are seeking to appoint a secretary to deal with the tremendous administrative work involved. The additional fees of the secretary’s fees will add to the price burden of the arbitration.

Ad hoc –less costly than institutional ?

In reality, a billboard hoc arbitration might not convince be less costly than the institutional process.

Firstly, the parties are required to form arrangements to conduct the arbitration but they’ll lack the required knowledge and expertise. Arbitrations are generally conducted by people that aren’t lawyers – however, this might end in misinformed decisions especially in international commercial arbitration.

Secondly, where there’s lack of cooperation between the parties or delay on the a part of the tribunal conducting the arbitration or writing the award, a celebration may have to hunt court intervention. Litigation costs wouldn’t only negate the value advantages of unplanned arbitration, but also the parties’ intention to avoid the courts through alternative dispute resolution methods.

Thirdly, in complex cases the tribunal may seek to appoint a secretary to affect the considerable administrative work involved. The extra costs of the secretary’s fees will increase the value burden of the arbitration[v].

Although unplanned arbitration is more flexible and sometimes best suited to the parties’ individual needs, it’ll only be cost-effective where:

• there is the specified cooperation between the parties;
• the parties understand arbitration procedures; and
• the arbitration itself is conducted by experienced arbitrators.

Conclusion

It is stated that events are the masters of arbitration. However, this is questionable in institutional arbitration, where the group efficiently acquires the parties’ powers to make selections – such as the appointment of arbitrators – and can impose their will upon the parties. This looks towards the spirit of arbitration. Although ad hoc arbitration can also seem preferable in today’s contemporary and commercially complicated world, it is truly solely appropriate for smaller claims involving much less affluent events in domestic arbitrations.

In the context of international commercial disputes, institutional arbitrations may be greater suitable – notwithstanding being greater expensive, time consuming and rigid. The institutional technique affords installed and up to date arbitration rules, support, supervision and monitoring of the arbitration, evaluates of the awards and strengthens the awards’ credibility. The unique circumstances of the parties and the nature of the dispute will subsequently determine whether or not institutional or ad hoc arbitration prevail.

Questions

1. What is arbitration?
2. What is institutional and ad hoc arbitration?
3. Why use ad hoc arbitration?
4. How ad-hoc arbitration works?
5. Whether ad-hoc arbitration less costly than institutional arbitration?

Endnotes

[i] http://www.legalserviceindia.com/article/l64-Ad-Hoc-and-Institutional-Arbitration.html

[ii] http://www.icaindia.co.in/HLC-Working-Paper-on-Institutional-Arbitration-Reforms.pdf

[iii] The Evolving Role of Institutional Arbitration in preserving parties’ due process rights

[iv] https://www.lw.com/thoughtleadership/guide-to-international-arbitration-2017

[v] Ulrich G. Schroeder, Ad hoc or Institutional Arbitration¾a clear-cut distinction? A closer look at borderline