What is Ad Hoc Arbitration and Why is it Used?

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What is ad hoc arbitration?

An ad hoc arbitration is where the parties do not select an institution to administer their arbitration. It offers parties the opportunity to conduct the arbitration how they wish, allowing more flexibility and freedom, but less support.

Why is ad hoc arbitration used?

Ad hoc arbitration can provide parties with greater freedom to make their own choices, but are lots of choices always a good thing?

Electing to move away from the rules of highly regarded institutions that govern many a successful arbitration can be extremely beneficial to some parties, but it has its risks.

This article looks at the features of an ad hoc arbitration and why it is sometimes used as an alternative to the institutional process.

What is the difference between institutional and ad hoc arbitration?

Institutional arbitration is where parties will specify an institution (such as the LCIA or LCC) that will administer the arbitration. By contrast, in ad hoc arbitration, no institution is involved; the parties administer the arbitration themselves.

Usually specified in the arbitration agreement (or a clause in an applicable contract), an institution will support the parties in their arbitration, from appointing an arbitrator to procedural rules and administering the final award.

Commonly used arbitral institutions in England and Wales:

Institutions that are commonly used in arbitrations seated in England and Wales include:

  • International Chamber of Commerce (ICC)
  • London Court of International Arbitration (LCIA)
  • London Maritime Arbitrators Association (LMAA)
  • The Grain and Feed Trade Association (GAFTA)

There are around 1200 institutions worldwide that offer arbitration services, and some will deal with a particular trade or industry, such as GAFTA or LMAA, listed above.

Each institution has its own set of rules which provide a framework for the arbitration, as well as administrative and practical assistance.

Parties should take care to select an institution with well-drafted rules and an excellent international reputation (this is especially important for disputes with a cross-border element).

Ad hoc arbitration rules

Choosing their own rules and resolving disputes in their own way can be an appealing prospect to contracting parties.

Some rules that might be chosen as an alternative to using an arbitral institution include:

  • UNCITRAL Model Law
  • Adapting a set of institutional rules (though care should be taken not to inadvertently create an institutional proceeding)
  • Incorporating statutory procedures (such as the English Arbitration Act 1996)
  • Using ad hoc provisions from another contract

Advantages of ad hoc arbitration

  1. Flexibility – parties decide the dispute resolution procedure themselves, such as which arbitrator to appoint, the seat and much more. They generally have a considerable amount of control over the proceedings, when compared to using an institution.
  2. More responsibility lies with the arbitrator – appointed by the parties themselves, more power is given to the arbitrator to organise and administer the arbitration (a role that would, in institutional arbitration, be managed by the institution).
  3. Parties’ costs will include the arbitrator, their legal team, and the costs of the proceedings – there are no institutional fees to pay, meaning costs can be lower than institutional arbitrations.
  4. Fee negotiations are a key part of ad hoc proceedings, but less so with institutions – as the arbitrator(s) will decide the outcome of your dispute, it is probably not the best move to upset them before an institutional proceeding even begins. If negotiating costs will be necessary, ad hoc arbitration could have the advantage.

Disadvantages of ad hoc arbitration

  1. Procedural decisions rely on the cooperation of the parties – at a time when there may already be a dispute, key decisions, such as how evidence will be admitted, might prove difficult to agree on.
  2. Further expenditure through the courts might be necessary – parties to the arbitration might have to approach the court in order to take the arbitration forward, particularly if certain parties are uncooperative, which could increase costs.
  3. Awards can lack credibility if not associated with a highly-regarded arbitral institution – this is of particular importance if enforcement will be sought internationally, or through foreign courts.
  4. It can take considerable time to cover all eventualities using ad hoc rules – parties risk having ambiguous terms if their contracts or clauses are not properly drafted, plus there is no guarantee that the final terms agreed will address all of the necessary eventualities.
  5. No standard review process for mistakes – institutions sometimes provide for a review of the award before it is finalised to ensure that any mistakes are corrected. Parties could then apply for corrections at this stage, saving a lengthier and more complex process further down the line. Ad hoc arbitrations may not provide for this, depending on the rules selected.

Summary

In short, it depends on what best suits any individual case. If using an institution will not provide a suitable process, ad hoc arbitration can be a useful alternative.

Some examples of where ad hoc arbitration may be more beneficial than institutional arbitration might include:

  • The administrative fees payable to the institution (for their services, use of facilities or even printing and binding costs, etc) can be very high. Sometimes, institutional fees can amount to more than the actual amount in dispute, so ad hoc arbitration could be more suitable for smaller claims
  • The added bureaucracy of working with an institution may lead to delays and additional costs. Even with the most highly regarded institutions, this is always a possibility
  • Parties may be required to respond to requests for documents (or even conclude their arbitration) within time frames that do not suit the parties’ needs or circumstances. In this case, ad hoc arbitration may enable parties to achieve fairness and equality of arms

As with many decisions requiring legal advice, the precise circumstances of both the parties and the dispute will ultimately determine whether ad hoc arbitration is most suitable.

A well-conducted arbitration, be it institutional or ad hoc, is an internationally regarded method for resolving a dispute out of court and in the vast majority of cases, results in a fair and internationally enforceable award.

For further information and legal advice concerning your particular circumstances, get in touch with the team at Carlsons Solicitors.

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