This article has been written by Nandini Shivhare, pursuing a Certificate Course in Arbitration: Strategy, Procedure and Drafting from LawSikho.
Table of Contents
Arbitration is an alternative to court action (litigation), it is a form of dispute resolution. Arbitration is the private, judicial determination of a dispute, by an independent third party. As per Section 2(a) of the Arbitration and Conciliation Act, 1996 “arbitration” means any arbitration whether or not administered by a permanent arbitral institution; It is typically used to resolve disputes between private entities outside the court machinery. There are several types of arbitration like Ad hoc arbitration, institutional arbitration, domestic arbitration, and international arbitration, etc. This article focuses on ad hoc arbitration. It has key features, advantages, disadvantages, and enforceability.
What is Ad hoc arbitration?
Since the arbitration agreement does not mention institutional arbitration, an ad hoc arbitration is one that is not managed by an institution such as the International Chamber of Commerce (ICC), London Court of International Arbitration (LCIA), Delhi International Arbitration Centre (DIAC), or The Dubai International Financial Centre (DIFC).
An ad hoc arbitration agreement could simply state:
Disputes between the parties shall be arbitrated in INDIA. Such a shortened arbitration arrangement will only operate if the jurisdiction chosen has defined ‘Arbitration law’. As a result, the parties will be responsible for all aspects of the arbitration, including the number of arbitrators, who will select them, the applicable law, and the way the arbitration will be conducted.
They can accomplish this in one of two ways:
- contractually designing a set of rules for a specific situation, or
- by opting for already-existing rules of procedure (such as the UNCITRAL Arbitration Rules, CPR Rules), or by transferring the rights to regulate the procedure upon the arbitral tribunal. Provided the parties approach it in a spirit of cooperation, ad hoc proceedings may be more flexible, cheaper, and faster than the administered proceeding. This type is popular due to the absence of administrative fees.
The parties have the option of adopting the rules established by a certain arbitral institution without referring their disputes to that institution. Parties may agree to nominate an arbitral institution as the appointing authority if they cannot agree on an arbitral tribunal.
Parties can also incorporate statutory procedures such as applicable arbitral law or adopt the UNCITRAL Arbitration Rules which are specifically designed for ad hoc arbitral proceedings.
Difference between ad hoc and institutional arbitration
The arbitration agreement in institutional arbitration refers to arbitration rules promulgated and administered by an arbitration institution, such as the International Chamber of Commerce Rules of Arbitration, the Swiss Rules of International Arbitration, or the American Arbitration Association’s ICDR Rules. In that situation, the arbitration is held under the institution’s auspices. An ad hoc arbitration clause exists when parties agree to arbitrate but do not refer to institutional arbitration procedures. The UNCITRAL arbitration rules, which are frequently used to govern ad hoc arbitrations, were devised by the United Nations Commission on International Trade Law (UNCITRAL). Parties may refer to them in the arbitration clause or later adopt them at the start of the arbitration procedures. In most cases, there is no institutional oversight of ad hoc arbitrations.
Knowing which institutional rules to use for the arbitration necessitates familiarity with the benefits and drawbacks of the many arbitration rules available on the market.
Advantages of ad hoc arbitration
- Suitable for all types of claims: If properly constructed, ad hoc arbitration should be less expensive than institutional arbitration. It can be used for any form of claim, no matter how big or small. Larger corporations may choose ad hoc arbitration since their in-house legal departments are frequently vast and skilled, and they have experience conducting arbitration hearings. Arbitration ad hoc can be structured in a number of ways. Ad hoc arbitration can be tailored to the parties’ specific needs, especially when the stakes are high or when a state or government agency is involved. By adopting or adapting appropriate arbitration rules, the parties can develop a method that is fair and suitable to both parties.
- Control of the process: parties can present their own rules and set convenient timelines for the arbitral process of the tribunal and to a diminished degree the parties can arrange and conduct their own proceedings.
- Agreed procedures: The effectiveness of ad hoc arbitration depends upon the parties’ willingness to agree upon procedures at the time when they are already in dispute. There may be a loss of time in addressing the issues if the parties do not cooperate in enabling the arbitration.
- Flexibility: Ad hoc arbitration is flexible in that it allows the parties to collaborate and choose the method of dispute resolution. It’s only natural that when a disagreement emerges, the parties would disagree on even the most basic of issues. Parties with different nationalities and jurisdictions, for example, may misunderstand each other. They may find it difficult to agree and collaborate, which could cause the arbitration to be delayed and the dispute to be resolved more slowly.
- Cost-effectiveness: Ad hoc arbitration is less expensive than institutional arbitration. The parties only pay fees of the arbitral tribunal, lawyers, or representatives, and the costs incurred for conducting the arbitration, i.e., expenses of the venue charges, etc. The parties will save the administrative fee paid to any institution.
- Remuneration of Arbitral Tribunal: In Ad hoc arbitrations, the parties must agree on a pay scale with the arbitral panel and directly agree on fees with the arbitral tribunal, which will be responsible for collecting the money from the parties.
Disadvantages of Ad hoc arbitration
There may be situations where ad hoc arbitrations may not be more advantageous than institutional arbitration.
- Selection of the arbitral panel: Parties in ad hoc arbitrations normally must rely on their own good judgment as to the identity and quality of the individual arbitrator. This may be especially challenging in international arbitration because a party may not be able to choose a well-known arbiter from his country due to national bias issues and may have little or no awareness of arbitrators from other countries. Parties must rely on their judgment while choosing an arbitrator prejudice due to national bias or insufficient expertise and knowledge of well renowned foreign arbitrators may affect the arbitration.
- Lack of expertise: It is a well-known truth that the arbitration clause is the last thing a contract draftsman looks at. As a result, it may be insufficient in a number of ways. In the absence of such scrutiny, arbitration may be governed by national laws, which may contain default provisions in the case of a party’s agreement being breached. When parties are represented by laypeople, they may lack the knowledge and skills needed to set up the required preparations for an ad hoc arbitration. Such parties may make erroneous decisions, especially if they are of different countries, which could impact the arbitration process.
- Failure to cooperate: Ad hoc arbitration has the drawback of relying on a spirit of collaboration between the parties and their counsel, as well as a sufficient legal system in the arbitration location. This may or may not be the case. Parties will need to plan ahead of time for all possible scenarios. The parties in ad hoc arbitrations will have to agree on their own timeframe provisions from the start. Internationally, this can be particularly problematic, because the parties will have met in the arbitration’s location, which is often another country and will only expect to return to the venue for the hearing proper, with pleadings and papers sent by post or electronically. Non-Corporation will more often than not result in a deadlock search roadblocks may be required to be resolved by parties at times residing in different countries or cities the parties may approach courts to resolve such issues to make headway in the arbitration leading to further expenses and defeating the process of an ad hoc arbitration namely resolving the dispute as soon as possible.
- The tribunal secretary: In more complicated cases, the arbitral panel may hire a tribunal secretary to handle the arbitration, particularly if it involves a lot of paperwork. The parties are responsible for these fees, which will be added to the arbitration costs. Default settings In ad hoc arbitrations, proceeding with the procedures in the absence of one of the parties may be riskier, because the absent party may subsequently challenge the decision on the grounds that the arbitral tribunal did not provide him with a fair hearing.
International arbitration brings parties from various countries in a structured manner to settle conflicts in front of a neutral arbitral tribunal. The parties have a choice between the type of which suits their purpose and objective. Ad hoc arbitration is suitable if the parties want to be the masters of the arbitration, ad hoc arbitration is the way to go, while formal arbitration is the way to go if they want fair deliberation. Parties are believed to be the masters of arbitration. However, in institutional arbitration, where the institution effectively inherits the party’s authority to make choices such as the selection of arbitrators and may compel the parties to submit to its will, this is debatable. While ad hoc arbitration may appear ideal in today’s modern and commercially complicated environment, it is only appropriate in domestic arbitrations for claims involving less wealthy parties. Institutional arbitrations, while being more costly, time-consuming, and rigid may be more appropriate in the sense of international commercial disputes. The administrative framework ensures the establishment of the arbitration process if well established and up to date arbitration rules, support, supervision, and evaluation of the arbitration, award analysis, and strengthening the integrity of the awards. The essence of the conflict and the party’s specific situations will eventually decide whether formal or ad hoc arbitration should be used.
Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.
LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join: