Topic:

AD HOC VS. INSTITUTIONAL ARBITRATION

Abstract:
The purpose of this analysis is to present in a comparative manner the main
similarities and differences between ad hoc and institutional arbitration, to identify the
possible interferences between the two forms of arbitration, to emphasize the
advantages and disadvantages of each, in order to determine whether institutional or
ad hoc arbitration should prevail, depending on the particular circumstances of the
parties and the nature of the dispute.

Content:
1. The choice of form of arbitration a decision with multiple implications
2. The main forms of arbitration
3. Ad-hoc arbitration advantages and disadvantages
4. Institutional arbitration advantages and disadvantages
5. Interferences between ad hoc and institutional arbitration
6. Conclusions
7. Bibliography

1. The choice of form of arbitration a decision with multiple

implications
Arbitration is a binding dispute resolution mechanism outside the national
court system (...) equally used for domestic and international arbitration 1. It is an
alternative to national courts, based on the agreement of the parties and the
alternative character stems for the principle of party autonomy; when choosing
arbitration, parties are free to choose the appointment of arbitrators, the language and
place of arbitration, the applicable law, the procedural rules. However, parties
freedom of choice is limited by public order and mandatory legal provisions. As a
private mechanism for dispute resolution, selected and controlled by the parties, the
ultimate purpose of choosing arbitration is the fact that it provides the parties with a
final and binding determination of their rights and obligations by means of fair, neutral
1 Julian D.M. Lew, Loukas A. Mistelis,Stefan Krll, Comparative International Commercial Arbitration,
Kluwer Law International, 2011

and flexible procedures in terms of time and costs involved and also considering the
other multiple aspects (such as confidential character of the proceedings etc.).
While choosing arbitration as the resolution mechanism for existing disputes or
for disputes that may arise between them, parties also choose one of the two forms of
arbitration: ad hoc or institutional arbitration. The choice for either form has to be
carefully considered by the parties, due to its multiple implications that this decision
has in respect with the arbitration regulations from the national law of the place of
arbitration, the agreement of the parties upon applicable rules, the legal regimes that
will apply (court assistance and possibility to obtain interim measures), the extent to
which the parties are able to control the arbitration process (selection of arbitrators,
organising arbitral proceedings, the procedure of taking evidence i.e. document
production, witnesses and expert reports, pleadings and hearings) and the ultimate
enforceability of the award rendered by the arbitral tribunal.
Parties should determine from the very beginning which of the two forms is the
most suitable for their case.
2. The main forms of arbitration
There are two main types of arbitration: ad hoc arbitration and institutional
arbitration, upon which the parties agree.
There is no exhaustive definition for ad hoc arbitration; this notion has rather a
definition by exclusion of institutional arbitration i.e. ad hoc arbitration is the form of
arbitration not held under the auspices or rules of any arbitration institution 2,
therefore ad hoc arbitration is where parties are silent and have not selected an
institutional arbitration. This type of arbitration is established for a particular dispute
and the parties are the ones who agree upon the way of initiating the proceedings, the
appointment of arbitrators and procedural rules to be applied to their specific case. In
absence of the parties agreement upon any of these aspects, the law of the place of
arbitration will be applied, therefore the arbitration law of the juridical seat will apply
by default and also as a gap-filler. 3
Institutional arbitration is where the parties submit their disputes to an
arbitration procedure, which is conducted under the auspices of or administered or
directed by an existing institution4. An institutional arbitration is one in which a
specialised institution intervenes and takes on the role of administering the arbitration
process. Each institution has its own set of rules which provide a framework for the
arbitration, and its own form of administration to assist in the process. Such institutions
2 Onyema, Emilia, International Commercial Arbitration and the Arbitrators Contract, London
and New York: Routledge, Taylor & Francis Group, 2010, page 26

3 Idem, page 26
4 Julian D.M. Lew, Loukas A. Mistelis,Stefan Krll, Comparative International
Commercial Arbitration, Kluwer Law International, 2011, page 36
2

are created to provide service specifically or considering their facilities and

infrastructure, in the context of their activity, functions and objectives, they offer
assistance for the conduct of arbitration proceedings. Some common institutions are
the International Chamber of Commerce (ICC), London Court of International
Arbitration (LCIA),the Dubai International Finance Centre (DIFC) and the Dubai
International Arbitration Centre (DIAC). There are approximately 1200 institutions
worldwide which offer arbitration services, and some will deal with a particular trade or
industry. Care should be taken in the selection process as some institutions may act
under rules which are not adequately drafted. Often the contract between two parties
will contain an arbitration clause which will designate a particular institution as the
arbitration administrator.
3. Ad-hoc arbitration advantages and disadvantages
Ad hoc arbitration is independent of any institution and it exists only in the
context of the dispute between the parties. The arbitration system is activated if a
dispute arises between the parties and one of them calls for arbitration or otherwise
initiates the procedure in accordance with the terms of the arbitration agreement or,
where appropriate, by some subsidiary rules that have been selected to apply to the
arbitration5. This form of arbitration offers flexibility to the parties in dispute with
respect to procedural aspects (number of arbitrators and method of appointment,
conduct of the proceedings, the way of taking evidence, pleadings and hearings),
subject to the mandatory law of the place of arbitration.
Under ad hoc references, their parties opt to create their own procedural rules,
for the particular arbitration reference. In furtherance of this, parties can regulate an
ad hoc arbitration by the express choice of arbitration rules, in their arbitration
agreement, as parties will consider most appropriate taking into account the
circumstances of their specific dispute. Therefore, parties may adopt or adapt the
Uncitral Arbitration Rules (designed especially for ad hoc arbitration and widely
recognized) or any other arbitration rules. The disputing parties may equally decide to
leave the determination of the arbitral procedure to the arbitral tribunal. Where the
parties fail or neglect to agree on a set of arbitration rules to apply, the arbitration law
of the place of arbitration will apply.
In case of ad hoc arbitration, the arbitration agreement, whether reached before
or after a dispute has arisen, may simply state that disputes between parties will be
arbitrated. It is infinitely preferable at least to specify the place or seat of the
arbitration as well since this will have a significant impact on several vital issues such
as the procedural laws governing the arbitration and the enforceability of the award. If
the parties cannot agree on the detail all unresolved problems and questions relating
to the implementation of the arbitration - for example, how the tribunal will be
appointed or how the proceedings will be conducted will be determined by the seat
or location of the arbitration. However, this approach will only work if the seat of the
arbitration has an established arbitration law.
5 Julian D.M. Lew, Loukas A. Mistelis,Stefan Krll, Comparative International
Commercial Arbitration, Kluwer Law International, 2011, page 37
3

Advantages of ad hoc arbitration

A properly structured ad hoc arbitration should be more cost effective, and
therefore better suited to smaller claims and less wealthy parties. The ad hoc process
places a heavier burden on the arbitrator to organise and administer the arbitration. A
distinct disadvantage of the ad hoc process is that its effectiveness is dependent 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 one or both parties to fully cooperate can
result in time spent resolving issues or an ultimate recourse to court.
A primary advantage of the ad hoc process is its flexibility, enabling the parties
to decide the dispute resolution procedure themselves. However, this will of course
require a greater degree of effort, cooperation and expertise from the parties to
determine the arbitration rules. Often the parties may misunderstand each other if
they are different nationalities and come from different jurisdictions, and this can
cause delays. Again, once a dispute has arisen this may frustrate the parties' intention
to resolve the dispute on an ad hoc basis.
Such situations can be avoided if the parties agree that their arbitration should
be conducted under certain arbitration rules. This will result in reduced deliberation
and legal fees, and parties will be able to begin proceedings early as they will not have
to engage in negotiating specific rules. The United Nations Commission on
International Trade Law (UNICITRAL) Arbitration Rules, revised in 2010, are among the
most suitable rules for this purpose.
Another reason why ad hoc arbitration is less expensive than institutional
arbitration is that the parties will only have to pay fees for the arbitrators, lawyers or
representatives and the costs incurred in conducting the proceedings rather than
paying fees to an arbitration institution. If the amount in dispute is considerable, these
fees can be prohibitively expensive. In order to reduce costs, parties and the
arbitrators may agree to conduct the arbitration at the arbitrator's office.
The arbitrators' fees will be negotiated directly between the parties and the
arbitrators, allowing them the option to negotiate, whereas in institutional arbitration
the arbitrators' fees will be set by the institution. The disadvantage here is that this
can involve an uncomfortable discussion and, in certain cases, the parties may not be
able to negotiate a fee reduction. The arbitrators are the 'judges' in the case and no
party would wish to upset the judge, particularly before the proceedings have even
commenced.
Disadvantages of ad hoc proceedings
Parties wishing to include an ad hoc arbitration clause in the underlying contract
between them, or seeking to agree the terms of arbitration after a dispute has arisen,
have the option of negotiating a complete 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 have not agreed on arbitration terms before any dispute arises they are
unlikely to fully cooperate in doing so once a dispute has arisen.
Bodies such as UNICITRAL have rules available which are designed specifically
for ad hoc proceedings. Other options available to parties wishing to proceed in this
way, who are not in need of rules drawn specifically for them, include: using or
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adapting a set of institutional rules such as the ICC Rules of Arbitration; incorporating
statutory procedures, such as the English Arbitration Act of 1996; adopting an ad hoc
provision from another contract. These options all carry certain risks. For example,
where rules drawn up by an institutional provider are incorporated into ad hoc
proceedings existing provisions which require administration by the provider - such as
making appointments - will need to be amended or excluded. This runs the risk of
creating ambiguities, or of the parties unintentionally creating an institutional process.
In terms of costs, in reality, an ad hoc arbitration may not prove to be less
expensive than the institutional process. Firstly, the parties are required to make
arrangements to conduct the arbitration but they may lack the necessary knowledge
and expertise. Arbitrations are generally conducted by people who are not lawyers however, this may result in misinformed decisions especially in international
commercial arbitration. Secondly, where there is lack of cooperation between the
parties or delay on the part of the tribunal conducting the arbitration or writing the
award, a party may need to seek court intervention. Litigation costs would not only
negate the cost advantages of ad hoc 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 deal with the considerable
administrative work involved. The additional costs of the secretary's fees will add to
the cost burden of the arbitration. Although ad hoc arbitration is more flexible and
often best suited to the parties' individual needs, it will only be cost effective where:
there is the required cooperation between the parties; the parties understand
arbitration procedures; an the arbitration itself is conducted by experienced
arbitrators.

4. Institutional arbitration advantages and disadvantages

If institutional administrative charges are not a concern for the parties, this
approach is usually preferred to less formal 'ad hoc' methods of arbitration. For those
who can afford institutional arbitration, the most important advantages are:
the availability of pre-established rules and procedures which ensure the
arbitration proceedings begin in a timely manner;
administrative assistance from the institution, which will provide a secretariat or
court of arbitration;
a list of qualified arbitrators to choose 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 effort of determining
the arbitration procedure and of drafting an arbitration clause, which is provided by the
institution. Once the parties have selected an institution, they can incorporate that
institution's draft clause into their contract. They may wish to add other elements to
the clause in some circumstances for more information, please see our separate OUTLAW Guide to Drafting an Arbitration Clause. These clauses can be amended from time
5

to time by the institution, drawing on experience in conducting arbitrations regularly,

and ensures there is no ambiguity in relation to the arbitration process.
An institution's panel of arbitrators will usually be made up of experts from
various regions of the world and include many different vocations. This allows parties
to select an arbitrator possessing the necessary skill, experience and expertise to
provide a quick and effective dispute resolution process. It should be noted, however,
that the parties merely nominate an arbitrator - it is up to the institution to make an
appointment and the institution is free to refuse an appointment if it considers that the
nominated arbitrator lacks the necessary competence or impartiality.
A further benefit of institutional arbitration is that the parties and arbitrators can
seek assistance and advice from institutional staff. In a less formal ad hoc
arrangement, parties to the arbitration would have to approach the court in order to
take the arbitration forward and this would inevitably incur further expenditure.
One of the perceived advantages of arbitration generally is that it provides a
final and binding award which cannot be appealed. However, there is an inherent risk
that a mistake made by a tribunal could not be rectified at a later stage. To
counterbalance this risk, some institutional rules provide for scrutiny of the draft award
before the final award is issued. A dissatisfied party could then appeal to an arbitral
tribunal of second instance which would be able to confirm, vary, amend or set aside
the draft award. Less formal processes provide no such option.
Disadvantages of institutional arbitration
The primary disadvantages of institutional arbitration are:
administrative fees for services and use of the facilities, which can be
considerable if there is a large amount in dispute - sometimes, more than the
actual amount in dispute;
bureaucracy from within the institution, which can lead to delays and additional
costs;
the parties may be required to respond within unrealistic time frames.

5. Interferences between ad hoc and institutional arbitration

A possible involvment of an institution in ad hoc arbitration is with respect to the
appointment of arbitrators. Where parties fail to come to an agreement, they have the
possibility to choose an appointing authority for this purpose and most of the
arbitration institutions provide this kind of services. However ad hoc proceedings need
not be kept entirely separate from institutional arbitration. Arbitration institutions may
provide the needed logistics for ad hoc arbitration. Additionally, the parties may decide
to engage an institutional provider to administer the arbitration at any time.
In practice, there were situations in which it was needed to delimitate the two
forms of arbitration. In Boviv v. Jay Tech, the High Court of Singapore reached a
different definition. The arbitration clause in a sub-contract provided for appointment
of the arbitrator by the Institute of Architects with SIAC Arbitration Rules as the
governing rules. The High Court (Singapore) held that the parties agreement is not a
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reference to institutional arbitration (under the auspices of SIAC), but to ad-hoc arbitral
proceedings applying SIAC arbitration rules6.

5. Conclusions

There are not accurate statistical information with respect to the number of
cases submitted to ad hoc and institutional arbitration during a certain period of time.
For ad hoc arbitration, a statistical information is very difficult or even impossible to be
obtained. In case of institutional arbitration, some institutions (such as ICC) publish
reports on the number of cases per year, but still cannot be aquired a definitive and
accurate report on a total number of cases. However, from the reports which were
published by institutitions, it is a visible increase of the number of cases each next
year.
The increasing number of cases submitted to arbitration institutions, due to their
overall popularity, would lead to the conclusion that this form of arbitration is preferred
by parties who opt for arbitration. However, parties concerns when choosing this form
of arbitration are in respect to Cost, delay and the fear of judicialisation of arbitration.
Provided the parties approach the arbitration with cooperation, ad hoc
proceedings have the potential to be more flexible, faster and cheaper than
institutional proceedings. The absence of administrative fees alone provides an
excellent incentive to use the ad hoc procedure.
It is said that parties are the masters of arbitration. However, this is
questionable in institutional arbitration, where the institution effectively acquires the
parties' powers to make decisions - such as the appointment of arbitrators and can
impose their will upon the parties. This seems against the spirit of arbitration. Although
ad hoc arbitration may seem preferable in today's modern and commercially complex
world, it is really only suitable for smaller claims involving less affluent parties in
domestic arbitrations. In the context of international commercial disputes, institutional
arbitrations may be more suitable - despite being more expensive, time consuming
and rigid. The institutional process provides established and up to date arbitration
rules, support, supervision and monitoring of the arbitration, review of the awards and
strengthens the awards' credibility.
The particular circumstances of the parties and the nature of the dispute will ultimately
determine whether institutional or ad hoc arbitration should prevail.

6 Onyema, Emilia, International Commercial Arbitration and the Arbitrators Contract,

London and New York: Routledge, Taylor & Francis Group, 2010, page 28
7

7. Bibliography
Books
1. Bobei, Radu Bogdan, Commercial Arbitration Elementary Handbook on
Scholarly Pragmatism, C.H. Beck, Bucharest, 2014
2. Lew, Julian; D.M., Mistelis, Loukas A.; Krll, Stefan, Comparative International
Commercial Arbitration, Kluwer Law International, 2011
3. Onyema, Emilia, International Commercial Arbitration and the Arbitrators
Contract, London and New York: Routledge, Taylor & Francis Group, 2010
4. Born, Gary B., International Commercial Arbitration (Second Edition), Kluwer Law
International, 2014
5. Redfern, Alan; Hunter, J. Martin; Blackaby, Nigel; Partasides, Constantine, Law
and practice of International Commercial Arbitration, Kluwer Law International,
2004