In this blog post, Ashutosh Singh, a student of Department of Law, University Of Calcutta, who is currently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses the intricacies of arbitration and its different types.
Before we get into the intricacies of arbitration and its different types, we must have a clear idea as to what is meant by arbitration in the international sense of the term. WIPO’S website defines arbitration as the process by which parties agree to submit a dispute to one or more arbitrators, who make a binding decision on the dispute. In choosing arbitration, the parties opt for an alternate method rather than going to court. Here, it must be kept in mind that arbitration is the mere replacement of litigation, it does not replace the judicial system in totality but rather it co-exists with it.
The purpose behind arbitration is to provide impartial and fair dispute resolution without the unnecessary delay and exorbitant costs. Subject to certain principles of public policy, arbitration allows parties to resolve a matter as per their conditions. Arbitration has become a very popular method of dispute resolution in modern times. Almost all commercial contracts, even the most simplest of them today contain an arbitration clause which the parties to the contract can evoke based on happening or not happening of certain conditions present in the contract itself.
We are concerned with ad hoc and institutional arbitration, their advantages over each other and which form suits a party to a contract in a particular situation. Both these forms have been discussed hereinafter-
Ad Hoc Arbitration –
This method of arbitration is such in which the procedure to be followed in the arbitration is not determined by any institution, the parties themselves decide the manner in which the arbitration shall take place. In the case of ad hoc proceedings, the parties themselves decide a lot of the details like the selection of the arbitrators, the place or better known in legal parlance as the seat of arbitration, applicable law, and the procedure and administration. There is a sense of cooperation between the parties in case of ad hoc proceedings and as a result of this, the process is more flexible, cheap and better administered. The mere absence of administrative fees in this case considerably brings down the cost of the entire process. The agreement containing the arbitration clause may simply state that “disputes arising between parties shall be arbitrated.” All unresolved question as to the appointment of the arbitration tribunal, the seat of arbitration, enforcement of the arbitral award, etc. if not mentioned in detail in the arbitration clause shall be governed by the local laws of the place. Further, the parties can any time during the proceedings, engage an institution to enter the arbitration.
An area of concern in this form of arbitration is that the parties formulate all the rules based on the future arrival of such complexities but it they during the time of the drafting of the arbitration clause fail to address all such issues, and one of them subsequently crops up then the parties would be in great difficulty. Another common practice is to copy the contract from certain institutional arbitrator but again here it would fail to cater to each and every need of the concerned parties, and it would often be enforceable in a different set of laws in case of international arbitration.
Institutional Arbitration –
This form of arbitration includes a permanent institution which assumes the administration of the arbitral process and it is then regulated by the rules of this institution. It must here be made clear that the institution does not arbitrate but the arbitrators which undertake the arbitration. Often, the contract between the parties may contain the name of the institution to which the arbitration is to be referred if the administrative costs are not very high then this form of arbitration is highly preferred. The common problems faced under this form of arbitration are that-
- The administrative costs very high sometimes they become even higher than the actual amount of the monetary dispute.
- Many institutions have bureaucracy and red tapism which further adds to the costs.
- The time frames allocated for the filing of replies are in some cases unrealistic.
The parties have to look into the institution which they have to choose for arbitration based on the nature and commercial value of the dispute, rules of the institution and record of such institution regarding the settlement of such disputes. There are over 1200 of such institutions, some of them are The London Court of International Arbitration, The Chartered Institute of Arbitrators, The International Court of Arbitration (Paris). So to choose an institution which caters perfectly to the needs of a party is a cumbersome exercise.
Now we come to the benefits which this form of arbitration offers. Basically, it provides with a pre-established method of arbitration together with well-drafted rules and regulations which give the impression if the arbitration meeting its purpose, administrative assistance with the necessary infrastructure is another benefit most of the institutions have proper courtrooms to assist the parties in arbitration, they also have proven arbitrators on board which makes the establishment of the arbitral tribunal a comparatively easier process and finally looking at their proven track record even reluctant parties become ready to undergo arbitration.
Another point of importance in cases of institutional arbitration is that they allow review and scrutiny of the draft award before the final arbitral awards are made. It is a well-known principle in arbitration that once the arbitral award is declared it can’t be appealed against, hence a simple mistake may cost the party substantial losses thus this facility of review allows them a second chance to make proper submissions before the Tribunal and this sometimes can change the very course of an arbitral award. This facility is not present in the case of ad hoc arbitration. Moreover, national courts also pay importance to the awards granted by these institutions as most of them have a lot of experience and are headed by experts.
Now, arbitration is based on the premise of freedom of the parties to settle disputes among themselves but what happens in the case of institutional arbitration is not arbitration in the strict sense of the term. Thus, ad hoc arbitration may be preferred in case of domestic disputes of lesser valuation, which provides the parties with freedom to operate among them, and moreover, the cost being less in ad hoc arbitration further provides an incentive to smaller players to step in these forms of dispute resolution. On the other side, when a lot of money is at stake, parties to a contract prefer institutional arbitration based on the fact that such arbitration involves specialized institutions and industry experts, so risks associated with ad hoc arbitration are minimized. Finally, it can be concluded that both ad hoc and institutional arbitration are efficient and whether a party may prefer one over the solely depends upon the specific needs of the parties to a contract.