Arbitration

Ad hoc arbitration

May 13, 2024

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This article is written by Arya Senapati. It attempts to analyse the practice of ad hoc arbitration in India and the move towards institutionalization of arbitration. It shall also refer to the difference between the two practices and the advantages and disadvantages of ad-hoc arbitration along with landmark case laws.

Table of Contents

Introduction

Arbitration has developed as a majorly preferred form of alternative dispute resolution in India and abroad due to its speedy and convenient nature. In the realm of arbitration, the two forms that are more prevalent worldwide are institutional arbitration and ad-hoc arbitration. While institutional arbitration is conducted by the arbitral institutions that have their own sets of rules and procedures regarding supervision and conduct of arbitral proceedings, ad-hoc arbitration is conducted based on the rules and procedures selected by the disputing parties. Therefore, ad-hoc arbitration provides more flexibility and higher party autonomy.

Since globalisation, ad-hoc arbitration has been used as a predominant method to resolve international investment disputes, international trade, commerce-related disputes, and much more. Even state parties prefer ad-hoc arbitration due to sovereignty considerations and faster resolution of conflicts, but the flipside to ad-hoc arbitration is the lack of standardised rules and procedures and heavy reliance on understanding between the disputing parties which is hard to achieve in most cases. From the Indian perspective, ad-hoc arbitration is highly preferred. Therefore, despite its loopholes, it has proven to be effective in resolving conflicts efficiently and its efficiency can be increased further by discussing the formulation of rules and procedures to standardise the proceedings and make them more uniform.

What is ad hoc arbitration

Ad-hoc arbitration is one of the two types of arbitration which is known for offering the highest form of flexibility and autonomy to the disputing parties. This is attributed to the lack of standardised procedures or regulation by institutional bodies. The choice of procedure falls on the disputing parties and therefore, they have the highest amount of autonomy as compared to any other form of dispute resolution. The parties also have the choice of selection of arbitrators. This makes ad-hoc arbitration truly unique as the disputing parties get immense control over the proceedings.

Simply put, ad-hoc arbitration is a type of dispute settlement mechanism where there is no standardised procedure, no prescribed mode of selection of arbitrators and no institutional control. The choice of procedure and mode of selection of arbitrators is at the behest of the disputing parties. They can either choose an already existing institutional procedure or form a new one that they deem fit.

Scope and applicability

While ad-hoc arbitration was initially used in international investment and commercial matters, its scope has widened post-globalisation to include all forms of commercial and corporate cases including but not limited to investment, breach of contract, management of a company, shares related disputes and much more. Its unique flexibility makes it adept for all kinds of disputes but it is largely seen to be suitable for company law related conflicts.

Early history of ad hoc arbitration

Even though the exact origins of arbitration cannot be traced, it can be said that it had prevalence in classical Greek and Roman eras where it was a preferred method of dispute resolution. It was used to settle matters of family, business, and criminal offenses. It was referred to as “arbitrum” in Rome and was highly relied upon to resolve multiple conflicts. In the Middle Ages, arbitration maintained its reputation but during the Renaissance phase, it gained extreme popularity as it became a tool for resolving conflicts around foreign investment and trade. With the creation of merchant guilds and associations for trade and commerce, the use of arbitration was sponsored by these bodies as it helped in speedier disposal of conflicts.

Towards the 18th-19th Century, ad-hoc arbitration became a popular form of arbitration as it was used to settle matters related to international commerce and investment disputes As global trade relations became complex, the emergence of ad-hoc arbitration became imminent and with the rising awareness regarding the necessity of speedier dispute resolution processes, traders chose ad-hoc arbitration as a popular dispute resolution method due to the higher levels of autonomy it provided to the parties for fixing the arrangement of the process. During this period as the world started to get more connected due to the emergence of globalization, International treaties and conventions came into existence which further propelled the growth of ad-hoc arbitration as a means of dispute resolution.

Up until the 20th Century, ad-hoc arbitration remained a popular method of dispute resolution for resolving matters of foreign investment and international trade but with the establishment of International Arbitration Organisations like the International Chamber of Commerce and the London Court of International Arbitration, a shift towards institutional form of arbitration was seen as corporates and traders preferred a formal and standard set of arrangement for arbitrating matters and getting a desired settlement which could be trusted due to standardization of processes. This institutional led to the formalization of arbitration proceedings where each institution had a specific set of rules and regulations, provisions, and procedures to determine the process of arbitration, the appointment of an arbitrator, the passing of the award, and its effect.

Advantages and disadvantages of ad hoc arbitration

Experts believe that a properly structured ad-hoc arbitration is much cheaper as compared to institutional arbitration and therefore, disputes which have smaller or lesser claims and disputing parties from less privileged backgrounds will always be more inclined towards ad-hoc arbitration. The effort is usually more on the side of the arbitrator(s) as compared to the disputing parties as the arbitrators are usually tasked with the duty of administering, managing, and organizing the entire process of arbitration which saves up a lot of time for disputing parties who are generally busy or run on a strict schedule.

On the contrary, one of the most explicit disadvantages of ad-hoc arbitration is that its effectiveness is highly reliant on the agreement of the parties. If the parties agree on a particular procedure or process, it can be highly efficient. However, considering that parties are already in dispute, it is likely that they won’t agree most of the time and therefore the entire process could be delayed and deemed to be ineffective. The lack of cooperation between disputing parties is generally expected but ad-hoc arbitration is entirely based on cooperation between both parties as this cooperation is what initiates the process and must continue throughout the proceeding to make the ad-hoc arbitration a matter of success.

Considering the above learnings, the primary advantages, problems and solutions of ad-hoc arbitration include:

Advantages of ad hoc arbitration

Flexibility

One of the most common advantages of ad-hoc arbitration is the flexibility that it offers. At the core of ad-hoc arbitration is party autonomy wherein the entire arbitration process is dependent on the choice of the parties regarding the selection of arbitrators, rules of arbitration, venue, etc. Even though it requires a higher level of cooperation, effort, and interest of disputing parties, it still offers a hefty amount of privilege as the parties understand the dispute better than anyone else and are best suited to come up with the right resolution method for the same.

The flipside of this advantage can be observed when parties come from different backgrounds or nationalities which leads to a failure of cooperation and understanding between the disputing parties consequently leading to delays and hefty expenditures. The absence of cooperation and understanding between the parties can at times also frustrate the interest of the parties to reach a settlement or to resolve the dispute altogether which is counterproductive to the entire process of arbitration. These problems do not arise in institutional arbitration as there are clear sets of rules and guidelines established by arbitration institutions that the parties have to abide by. However, this problem in ad-hoc arbitration can be resolved if the parties at once agree to a unified rule to apply to the entire proceeding and decide to abide by the same throughout the proceedings. There are many rules which are used in ad-hoc arbitration but the UNCITRAL Model of Rules is the most preferred one and is highly suitable.

State parties

Owing to the higher degree of flexibility offered by ad-hoc arbitration, it is preferred highly in matters that involve parties associated with the state i.e., the state itself, state associations, authorities, or bodies. State parties are usually of the opinion that by agreeing to an institutional mode of arbitration, where there are pre-decided rules and processes, their entire sovereignty is diluted. For a state party, sovereignty is of utmost importance and sovereignty implies the ability of a state to make its own decisions without any external force or interference. The flexibility of choice that ad-hoc arbitration offers is therefore preferable to state parties as they desire to protect their sovereignty from being hampered in any case.

Ad-hoc arbitration grants the liberty to choose a process that can lead to quiver settlement of issues if followed properly with party cooperation and when matters involve high amounts of money from public funds, it is in the interest of the state to resolve the matter quickly to preserve the general interest of the public. Another factor that enables quicker resolution in ad-hoc arbitration is that parties are allowed to frame the issues of disputes on their own which helps in making the dispute clear and distances any kind of confusion. This leads to a wholesome and quick resolution of conflicts.

Less expenses

Due to the inexpensive nature of ad-hoc arbitration, it is highly preferred by many disputing parties as it costs less compared to institutional arbitration. In ad-hoc arbitration, parties have to pay a sum of money only to the arbitrators, lawyers, or representatives as well as the organizing costs which will typically include the cost of the venue and conveyance plus expenses incurred by the arbitrators. In institutional arbitration, a separate fee is paid to the arbitration institution which is a hefty amount that disputing parties save by opting for ad-hoc arbitration. Most times, due to the flexibility of ad-hoc arbitrations, the disputing parties, as well as arbitrators end up using the office of the arbitrators to conduct an arbitration process which always ends up saving the costs of the venue.

It is worth pointing out that recently there has been a lot of discussion around implementing the 4th Schedule of the Arbitration and Conciliation Act, 1996 to create a model fee structure for ad-hoc arbitration proceedings. In a recent judgement, the Supreme Court wanted to initiate a contempt proceeding against a Public Sector Undertaking (PSU) for haggling over arbitral fees of an arbitral panel that consisted of retired judges and stated that there is a need for standardising a fee structure for preventing such matters in the future.

Even the 246th Law Commission Report called for the fixation of arbitral fees by virtue of the Fourth Schedule of the Arbitration Act through it’s integration into High Court Rules. The commission also clarified that the Fourth Schedule should be applicable to purely domestic and ad-hoc arbitration matters. Through the 2015 Amendments, Section 11(14) was introduced which stated that the determination of arbitral fees will depend upon the rules framed by the High Court after considering the rates proposed in the Fourth Schedule.

Based on these provisions, the Delhi High Court in the case of G.S. Developers and Contractors v. Alpha Corps (2019) as well as the Bombay High Court in the matter of Vestas Wind Technology v. Inox Renewables (2019) held that the model fee structure is merely a recommendation and becomes binding only if it is integrated through rules of the High Court. Therefore, an urgent need is felt to integrate the Fourth Schedule through High Court interventions to standardise and create a model fee structure for arbitral panels and prevent any dispute or contempt arising due to arbitral expenses.

Negotiation

Parties have higher negotiation power on certain matters in ad-hoc arbitration as compared to institutional arbitration. In ad-hoc arbitration, the parties are free to negotiate with the arbitrators regarding the fees. However, in institutional arbitration, the fees given to the arbitrators are already set by the institution and there is no scope for negotiation or bargaining.

The opportunity to negotiate also offers the parties a chance to reduce the costs of the arbitration process and save money in the process but the downside to this is that most parties would not negotiate with arbitrators as arbitrators are usually the judges of the case and no party wishes to displease the judge in any manner whatsoever to prevent an uncomfortable situation. Therefore, a substantial reduction in the fees of an arbitrator through negotiation is a rare instance

Disadvantages of ad hoc arbitration

Lack of meeting of minds

As parties in ad-hoc arbitration are given absolute liberty to frame their own set of rules to be applied in the arbitration process, the entire procedure for framing the rules or settling upon one rule requires the meeting of minds or understanding between the disputing parties. Considering the parties are already in dispute, it is tough to find a common ground even before the process starts. This leads to the expense of a considerable amount of time, money, and effort in the absence of surety that things will eventually reach a consensus in the end.

Selection of arbitrators

In ad-hoc arbitration, the parties are at the liberty of selecting or appointing arbitrators on their own after settling on a particular procedure for appointment but considering that there is no regard for the qualification or competency of an arbitrator in ad-hoc arbitration, parties may end up appointing an incompetent arbitrator, who can hamper the proceedings drastically and end up providing an unfavorable settlement. In institutional arbitration, the arbitration institutions have a panel of arbitrators.

To be a part of the panel, the arbitrators are judged based on set standards, and a thorough background check is conducted by the institutions to ensure that the arbitrator is competent enough to handle the dispute and settle it effectively based on experience and qualifications. This also ensures a smoother process of arbitration and a desirable result based on set laws and policies as well as qualified judgment which is essential for resolving any dispute. Another aspect is that most institutions for arbitrations have an institutional staff who constantly monitors the progress of an arbitration matter and ensures that the matter reaches a settlement in due time and an award is drafted and finalized by the arbitrators.

However, in the ad-hoc system, due to the lack of such institutional mechanisms and the possibility of an incompetent arbitrator presiding over the matter, there is a high likelihood that the parties will eventually have to resort to the court to seek a settlement on the issue and that would negate the inexpensive nature of ad-hoc arbitration as the parties would end up spending more after seeking two different modes of dispute resolution. Even the enforcement of arbitral awards obtained through ad-hoc arbitration can be a major challenge.

The middle ground which is suggested by many scholars and experts to prevent such disadvantages is to design the rules and procedures of an ad-hoc arbitration based on an already existing arbitration rule. For instance, the UNCITRAL Model Law on Arbitration also prescribes rules which are explicitly designed for ad-hoc arbitrations and these can be highly helpful for disputing parties who do not have a lack of cooperation and cannot end up framing the rules of arbitration. Parties can also utilize and adapt existing rules like the ICC Rules of Arbitration based on their requirement or they can take rules from national statutes and legislations like the English Arbitration Act, 1996.

Ad hoc arbitration and Company Law

In the Indian Context, ad-hoc arbitration is highly suited for matters of dispute involving corporate and commercial laws. This can be attributed to the fact that the managers of a corporate entity have busy schedules and wish to settle disputes quickly and inexpensively to return their attention to their core business processes. Any delay in settling puts the revenue and reputation of the company at stake.

It has been observed that ad-hoc arbitration is highly suitable for settling disputes arising from shareholder disagreements, contract breaches, corporate governance issues, and disputes connected to intellectual property rights. However, ad-hoc arbitration also has multiple challenges like the unavailability of a uniform process, the possibility of selection of a biased arbitrator, and weak enforcement of arbitral awards obtained from arbitration of the ad-hoc nature. To counter these problems, the parties must draft clear and concise arbitration agreements mentioning the rules and process of arbitration, the consequences of the arbitral awards, and the process of enforcing them. The parties must also ensure that they choose qualified arbitrators who have no interests or conflict in the matter. Once that is taken care of, companies can get their desired outcomes from the process of ad-hoc arbitration.

It has also been observed in multiple Indian cases that ad-hoc arbitration has been successful at dealing with corporate disputes. For example, in the case of Reliance Infra Pvt. Ltd v. National Highway Authority of India (2008), the parties had an arbitration clause in their agreement to resolve disputes through ad-hoc arbitration and they encountered disputes in connection with the construction of a highway. After the case ended, the arbitrators awarded damages of almost 100 Billion Rupees to Reliance Infra. Similarly, in the case of Hindustan Construction Company Ltd. v. Ministry of Urban Development (2019) the parties entered into an arbitration proceeding of an ad-hoc nature to settle a conflict arising out of the construction of a metro railway project.

At the end of the arbitration, the arbitrators awarded damages of over 20 Billion Rupees to Hindustan Construction Company. Also, in the case of V.K. Bansal v. Birla Corporation Ltd (2014), an application was filed under Section 241 of the Companies Act, 2013 to resolve a matter of dispute arising from the mismanagement of the Birla Corporation Limited. In the matter, the National Company Law Tribunal held that whenever there is a dispute which has arisen due to the oppression and mismanagement of a company, a shareholder can file an application under Section 241 of the Companies Act for arbitration, even though the shareholder holds less than 10% of the shares of the company.

Use of UNCITRAL Arbitration Rules in Indian ad hoc arbitration

Ad-hoc arbitrations by their very nature are dependent on the choice and understanding between parties and the disputing parties are free to decide the procedural norms that will be applied to the proceedings after the selection and appointment of arbitrators. Very rarely do parties agree on one particular set of procedural norms which leads to a lot of delay and expenses in terms of time and money. It is also unfair to expect such a situation of consensus as parties are already in dispute and therefore their minds may not always meet. The UNCITRAL Model Law on Arbitration has become a solution for such situations as more and more ad-hoc arbitrations are being conducted by getting inspired by the system.

The initial use of the UNCITRAL model in ad-hoc arbitration was seen in matters involving ad-hoc commercial arbitration and arbitrations related to investment treaties. Post this, many arbitrators started choosing the UNCITRAL Model as an ideal rule for ad-hoc arbitrations. In the Indian context, the Central Government abstained from using its legislative power given to it under Section 84 of the Arbitration and Conciliation Act, 1996 to create any rules about the process of ad-hoc arbitration.

The UNCITRAL Model Law creates certain standards that inspire many nation-states to integrate the model into their domestic arbitration rules. It provides a detailed procedural framework for arbitration proceedings which are followed by arbitrators to reach a desired settlement. The 246th Law Commission Report of India recognised and acknowledged the fact that the Arbitration and Conciliation Act, 1996 is heavily based on the UNCITRAL Model Law on International Commercial Arbitration, 1998, and the UNCITRAL Conciliation Rules, 1980. Considering the effectiveness of this relation and the deep linked connections between the model law and the domestic law, experts often argue that this model can be a suitable rule for ad-hoc arbitrations.

UNCITRAL notes on organising arbitration proceedings

Even though the UNCITRAL Model Law is a highly popular document, there is another UNCITRAL document that many are not aware of. This piece of document is referred to as the UNCITRAL Notes on Organizing Arbitral Proceedings (UNOAP). Even though the UNCITRAL Model rules are clear, comprehensive, and adequate for being utilized in ad-hoc arbitrations, the agency felt the need to create a separate document to assist Arbitral Tribunals in matters of organizing arbitral proceedings. Based on this necessity, the UNOAP was adopted in the year of 1996.

These are guidelines to the parties to provide them with a clear idea of the structural setup, operational frameworks, and functioning of the International Commercial Arbitration Process. The ideas that emerge from the UNOAP are also suitable to the Indian Ad-hoc arbitration proceedings as claimed by experts. Due to the strong connections between the UNOAP and UNCITRAL Arbitration Rules which further is connected to the Indian Arbitration and Conciliation Act, 1996, it can be said that there exists a clear nexus between the UNOAP and Ad-hoc arbitrations in India.

Co-existence of ad hoc and Institutional arbitration

While discussing the need for a system of rules for ad-hoc arbitration in India, the first thing that scholars point out is that in a large space like India, the government and arbitration community are constantly pushing towards a shift to institutional arbitration. The disputing parties usually prefer ad-hoc arbitrations.

However, It is fair to say that in a large region like India, both institutional and ad-hoc arbitration proceedings can easily co-exist without having to push one above the other as the larger corporates, high-net-worth individuals, international conglomerates and affluent parties can afford the institutional form of arbitration while those seeing greater autonomy and cheaper costs can go for ad-hoc arbitration as they have been. This fact necessitates the growing importance of having a set of rules for ad-hoc arbitration in India because due to the popularity of this form of arbitration, it is not going anywhere but rather can see a higher rate of adoption. The biggest deficiency in organizing and administering an ad-hoc arbitration for an arbitrator is the lack of procedural guidance and uniform framework.

For instance, there are no established principles for acceptance and denial of documents in ad-hoc arbitration, and usually, the local norms that are followed by regional courts are adopted for the same in ad-hoc proceedings which vary from place to place.

Application of Civil Procedure Code and Indian Evidence Act

Another problem arises due to the ambiguity present in Section 19 of the Indian Arbitration Act, 1996 which deals with the process of determination of rules and procedure. The ambiguity arises because the section does not specify in which manner established laws like the Civil Procedure Code, 1908 (CPC) or the Indian Evidence Act, 1872 (IEA) will relate to arbitration proceedings. It doesn’t completely prohibit nor does it completely approve the application of these procedural laws on arbitration matters. It simply states that the Arbitral Tribunal shall not be bound by the CPC and Evidence Act. Due to this ambiguity, different arbitrators are seen to take different approaches. While some arbitrators apply the rules too strictly, some have a very loose attitude towards the application of CPC and IEA to arbitration matters. While stating this, it comes with a note of caution from experts that they do not endorse the application of CPC and IEA to arbitration matters but simply state that clarity on the matter would have proved beneficial for arbitrators to conduct the proceedings smoothly which could also help ad-hoc proceedings.

Coming to the ad-hoc proceedings, the structure of the statement of claim and statement of defense in ad-hoc proceedings derives insignificant guidance from the Indian Arbitration Act. Section 23 of the Act is the provision that deals with the procedural requirements for a Statement of Defence and Statement of Claim. This lack of guidance can be attributed to Article 23 of the UNCITRAL Model which states that the Statement of Claim shall contain “facts supporting his claim, the points at issue and the relief or remedy sought”. This one example of the lack of specificity is highly used by experts to claim how ad-hoc arbitration in India is affected by the lack of rules and the ambiguity in rules that they can be inspired by.

Experts argue that there is an undeniable nexus of UNCITRAL Model Law on International Commercial Arbitration which ties UNCITRAL Arbitration Rules and the Arbitration and Conciliation Act of 1996. Therefore, they state that the similarities between the UNCITRAL Arbitration Rules and Arbitration Act are natural to exist but this also becomes a problem when the UNCITRAL Arbitration Rules are applied to ad-hoc arbitration in India. Scholars claim that UNCITRAL Arbitration Rules will not be a strong choice for ad-hoc arbitration in India because there are a lot of overlaps and omissions between the Arbitration Act and the UNCITRAL Rules.

An example of a problem that could arise from this is that when an award is challenged, there will be inevitable debates regarding the similarities and differences between the UNCITRAL Arbitration Rules and the Arbitration Act. Therefore, it is necessary to provide an improvised version of UNCITRAL Arbitration Rules to be suitable for ad-hoc arbitrations in India. Even though scholars do not believe in the creation of a mandated set of rules for ad-hoc arbitration in India by the Central Government made through the exercise of its power under Section 84 of the Arbitration Act, 1996, they provide two options that can be viable and those are:

Parties should be free to choose between a set of one or more enacted rules that are recognised under section 84 as recommendations of a non-binding nature, or;
A voluntary code can be designed based on the beneficial provisions of UNCITRAL Arbitration Rules, UNOAP, and other institutional rules through consultation between various reputed arbitrators of India. These rules must be simple but well-structured and clear. These could be easily applied to ad-hoc arbitrations.

Either of the options does not take away the party’s autonomy and flexibility of choice which makes ad-hoc arbitrations unique and popular. They simply suggest the creation of non-statutory guidelines with no binding effect or force to make ad-hoc arbitrations more framework-oriented, formal, and standardized for easier conduction and management of proceedings. These voluntary sets of recommendations and rules can also be amended from time to time and can serve as a guidance measure for various arbitrators conducting ad-hoc arbitration proceedings in India. As has been previously discussed, state parties usually choose ad-hoc arbitration to protect their sovereignty and for a quicker resolution of disputes involving high amounts of public funds. Therefore if these non-statutory measures are ever created, state parties from both central and state governments can adopt these rules in their own arbitrations to make these rules popular in other arbitration which are ad-hoc in nature.

Ad hoc arbitration vs. institutional arbitration

In both theory and practice, there are two prevalent modes of arbitration practiced in India. They are:

a) Ad-hoc arbitration, and

b) Institutional arbitration

Here are the basic differences between the two:

Category	Ad-Hoc arbitration	Institutional arbitration
Procedure	The parties are free to choose any procedure which shall be applicable throughout the proceedings.	The institutions have their own sets of procedures which shall apply to the proceedings.
Selection of arbitrators	Parties decide the mode of selection of arbitrators. There are no prescribed qualifications as such.	The arbitrators are appointed after a careful review of their qualifications from the panel set up by the institutions.
Supervision/ Regulation	The proceedings are not regulated by anybody or authority.	The proceedings are constantly regulated and supervised by the institutional staff.
Level of flexibility	Higher	Lesser

Ad-hoc arbitration has become one of the most popular forms of dispute resolution in India. It means that it is a form of arbitration that is not governed or administered by any institution, entity, or individual except the arbitrating parties. The willingness of the parties to enter into arbitration is enough to initiate the processes and the disputing parties make their own arrangements regarding the possession of selection of arbitrators. Therefore, ad hoc arbitration is a process of arbitration where the parties regulate the process and procedure themselves without any intervention from any institution, entity, or individual. They lay out every aspect of the arbitration proceedings on their own accord. The parties are free to design the applicable rules of the process on their own.

In contrast, Institutional Arbitration is the process where the settlement of disputes is done by the intervention of established arbitral institutions. Each of these arbitral institutions has separate rules of their own which are applied uniformly on all arbitration matters referred to these institutions. In simpler terms, institutional arbitration is the process of arbitration wherein specially established institutions intervene and overtake the responsibility of handling the process of arbitration on their own accord through established rules and processes. These institutions help in the standardization of the process of arbitration and ensure that uniform application of rules is followed for all matters referred to them. This also ensures speedy resolution of conflict. These institutions also make it easier by providing processes for the selection of arbitrators, management of cases, and supervision of the entire arbitration process. Through their specific and distinct set of rules and procedures, they assist the disputing parties in reaching a desirable settlement of their conflicts. The institution itself doesn’t arbitrate the matter but the arbitral panel is the body that helps in arbitrating the matters of conflict. The inspiration behind the institutional method of arbitration is the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Commercial Arbitration.

Globally, many arbitral institutions have been recognized to provide exceptional conflict resolution services. In India itself, the most reputed ones include the Indian Council of Arbitration, the Delhi International Arbitration Centre, and the Mumbai Centre for International Arbitration. Each of these institutions has its own set of arbitral rules which are strictly followed in the arbitration processes to resolve the conflict and reach a settlement. All these institutions also provide various administrative support to make the process smooth and easy for arbiters. These institutions also have separate panels of arbitrators and offer various venues for conducting the arbitration proceedings. Even after the existence of all these processes and institutions, India has still not chosen institutional arbitration as a preferred mode of dispute resolution.

Landmark rulings surrounding ad hoc arbitration

Oil and Natural Gas Corporation Limited v. Afcons Gunanusa JV (2022)

In this matter, the Supreme Court of India dealt with matters related to fees of the arbitrators in ad-hoc arbitration proceedings and held that:

Arbitrators cannot decide the arbitral fees on their own and can simply exercise discretion regarding the apportionment of arbitral fees in arbitration proceedings. They can also demand the fees to be deposited and can exercise the power of lien on the passing of an arbitral award in case payment is not made.
The arbitral award must be fixed at the beginning of the arbitral proceedings to avoid any conflicts regarding the amount and create unnecessary delays in the proceedings. This should also be done to avoid any kind of conflict between disputing parties regarding payment of fees.
“Sum in dispute” will always be interpreted as the sum in dispute in a claim and counterclaim separately and not cumulatively. Therefore, arbitrators can charge separately for claims and counterclaims in ad-hoc arbitration proceedings.
The ceiling limit for arbitral fees is 30,00,000 INR and an additional amount of 25% can be paid to a sole arbitrator. This is prescribed by the fourth schedule of the Arbitration and Conciliation Act.
In cases where parties are not in agreement regarding the fees of the arbitrators, the court cannot fix the fee but the arbitral tribunal should fix a reasonable amount as the arbitral fee for the proceedings.
It is not in the right of the arbitral tribunal to seek any form of revision of the arbitral fees in situations where the parties have already fixed the amount in an agreement for ad-hoc arbitration.
Only the parties or a written order of a court can increase the arbitral fee amount fixed by the parties in an agreement.

NHAI v. Gayatri Jhansi Roadways Ltd (2019)

In this matter, the Supreme Court dealt with the question of the applicability of the Fourth Schedule in cases where the fees of the arbitrators have been fixed by the parties prior to the proceedings. The Supreme Court stated that in such cases, priority should be given to the agreement made by the disputing parties regarding the amount of fees that should be afforded to the arbitrators. In cases of institutional arbitration, the fourth schedule shall be used to determine the fees of the arbitrators by the arbitral institutions but in the case of ad-hoc arbitration, party agreement should be given the first priority.

Recommendations

While the ad-hoc form of arbitration has gained massive popularity and adoption, especially in corporate and commercial matters, its loopholes cannot be ignored especially due to its mass appeal. Therefore, certain recommendations have to be made to sustain the popularity of ad-hoc arbitration and make it favorable. These are:

The creation of unified and standardized voluntary and non-binding rules could inspire ad-hoc arbitration proceedings in case of a lack of understanding between the disputing parties.
The government must promote the rules and must promote ad-hoc arbitration specifically for commercial and corporate matters owing to its suitability to such cases and must incentivise parties with tax breaks or lower court fees.
A central authority can be established by the national government to supervise and administer ad-hoc arbitrations in India and also provide guidance or assistance whenever required by parties for arbitrators.
Model arbitration clauses and procedures could be drafted, published, and disseminated by the government to popularize a standardized mode of ad-hoc arbitration and make it more favorable.
Awareness must be spread regarding the feasibility of ad-hoc arbitrations in company law-related disputes and education regarding the pendency of cases in adversarial litigation and the benefits of arbitration.
The Company Law could be amended to specify clear-cut processes for appointing arbitrators who are qualified and specialized in corporate matters for ad-hoc arbitration specifically involving corporate disputes.
Measures must be taken to promote transparency and accountability in the conduct and administration of ad-hoc arbitration proceedings. Mechanisms must be developed to make the arbitrators accountable for their actions.
Ad-hoc arbitration is an inexpensive mode as compared to institutional arbitration and therefore it must be promoted for disputing parties belonging to less affluent communities to resolve their disputes speedily and cost-effectively.
There should be a designated time limit imposed on ad-hoc arbitration matters to prevent lengthier proceedings that go on for ages without providing any solution.

By implementing these recommendations, the Indian government and the Indian arbitration community can find feasible solutions for countering the challenges posed by the current system of ad-hoc arbitration in India and rely on the mode for better resolution.

Conclusion

To conclude, it is fair to say that ad-hoc arbitration has stood the test of time and will be one of the most popular modes of dispute resolution going forward in the future. Its popularity can be attributed to its convenience, flexibility, and inexpensive nature. Even though the government is pushing for institutional arbitration through various channels by creating different arbitral institutions in India, the disputing parties are time and again preferring to go for ad-hoc arbitration. Therefore, the government must recognise that this is the most suitable time to standardize the process of ad-hoc arbitration to serve the interests of justice and conflict management. By creating voluntary and non-binding, non-statutory regulations regarding rules and procedures for ad-hoc arbitration, the government can better serve the interests of disputing parties who choose alternative dispute resolution mechanisms for reaching a settlement.

The popularity of ad-hoc arbitration should not be ignored simply due to the attractive sophistication provided by institutional arbitration. In the run of making India a desired venue for institutional arbitration, the government should not compromise on standardizing one of the most preferred forms of dispute resolution in India. Last but not least, ad-hoc arbitration is highly favorable for corporate matters and its adoption for the realm must be explored thoroughly by experts and scholars with the assistance of government bodies and authorities.

Frequently Asked Questions (FAQs)

Can the Indian government formulate rules to standardize procedures for ad-hoc arbitrations?

Yes, as per Section 84 of the Indian Arbitration Act, 1996, the Central Government has the power to formulate rules and procedures to be applicable to ad-hoc arbitrations in India but it has abstained from utilising those powers to maintain the autonomy of parties in ad-hoc proceedings.

Which provision of company law empowers shareholders to file an application for arbitration?

Section 241 of the Companies Act, 1956 states that whenever there is a dispute which has arisen due to the oppression and mismanagement of a company, a shareholder can file an application under Section 241 of the Companies Act, 1956 for arbitration, even though the shareholder holds less than 10% of the shares of the company.

What was the main recommendation of the 246th Law Commission Report?

The 246th Law Commission report felt the necessity of a paradigm shift from ad-hoc arbitration to institutional arbitration and since then has inspired the government to take multiple steps to make institutional arbitration preferable in India and to make India a preferred destination for institutional arbitration.

Which international law is best suited for ad-hoc arbitration?

While UNCITRAL Model Law requires some modifications to be suitable for ad-hoc arbitration, the most important material that could determine the proceedings of ad-hoc arbitration is the UNCITRAL Notes on Organising Arbitration.