Ad Hoc Arbitration
Arbitration is a type of Alternative Dispute Resolution (ADR), where parties agree to settle disputes arising out from an agreement or commercial relationship without resorting to court by selecting a third impartial party to hear their case and issuing a binding decision upon the parties.
The mechanism of arbitration differs from court proceedings, as the arbitrator(s) and the governing law are chosen by the parties, and the proceedings are expected to be of shorter duration.
The arbitral proceedings aim to achieve accuracy, efficiency, and a final, binding, and enforceable award, as a result, the principal and main aim in connection with resorting to arbitral proceedings is the mitigation of the stringent and lengthy judicial proceedings.
For the sake of transparency, parties resort to arbitration usually in commercial disputes in the context of international commercial transactions, and in foreign investment disputes.
There are two types of arbitration – institutional arbitration and ad hoc arbitration. In this article, we will be focusing mainly on ad hoc arbitration.
How Ad Hoc Arbitration differs from Institutional Arbitration?
An ad hoc arbitration, on one hand, is where the parties do not select an institution to administer their arbitration.
It offers parties the opportunity to independently determine the procedure, without the involvement of an arbitral institution, allowing more flexibility and freedom, but less support.
However, the smooth running of an ad hoc arbitration can be facilitated by the appointment of an arbitral institution.
On the other hand, institutional arbitration is one in which a specialized 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.
Ad Hoc Arbitration Agreement
Parties can agree to include the ad hoc arbitration clause either when concluding their contract or after a dispute has arisen. This agreement can take three forms:
Phase 1:
The most basic, but with the greatest risk of failure, parties can simply agree to arbitrate future disputes without designating an institution to administer the arbitration.
Phase 2:
Alternatively, parties can negotiate a detailed ad hoc arbitration agreement. Such an agreement should cover, among other things, the seat of arbitration; the applicable law; the number of arbitrators and the method of their appointment; document disclosure; witness statements; written submissions; the effect of the tribunal’s orders and awards; waiver of sovereign immunity for contracts involving States; and costs.
Phase 3:
A third and most efficient option is for the parties to agree that arbitration will be conducted in accordance with an established set of ad hoc rules, for example, the UNCITRAL Arbitration Rules, or incorporating statutory procedures, such as the Egyptian Arbitration law.
Advantages of Ad Hoc Arbitration
Ad hoc arbitration has several attractions, for instance:
1- Flexibility
The key advantage is flexibility, as the parties can choose the rules of procedure that suit their specific needs and the facts of the particular dispute.
2- Avoid the administrative fees
Secondly, ad hoc arbitration allows the parties to avoid the institution’s administrative fees for supervising the proceedings.
In other words, Ad hoc arbitration should be more cost-efficient and best suited to the parties’ individual needs.
In addition, the arbitrator’s fees can be negotiated directly by the parties, whereas, in institutional arbitration, it is set by the institution.
3- Concern that commercial arbitral
Third, States and State-owned entities have traditionally preferred ad hoc arbitration due to a concern that commercial arbitral institutions are focused on the needs of commercial users of arbitration.
In addition, issues of public policy and sovereignty are more likely to arise, accordingly, it can be solved easily by advising a procedure, that takes into consideration the particular status and requirements of the State party.
4- Organize and administer the arbitration
Forth, more responsibility lies with the arbitrator(s) appointed by the parties; more power is given to the arbitrator to organize and administer the arbitration – a role that would, in institutional arbitration, be managed by the institution.
Disadvantages of Ad Hoc Arbitration
Electing to move away from the rules of institutions can be extremely beneficial to some parties, however, it also carries several risks, for instance:
First
When negotiating and drafting an ad hoc arbitration agreement, parties may fail to account for all eventualities that may arise during an arbitration. The parties’ agreement on the procedure may also be ambiguous or otherwise defective.
While problems with the agreement can be addressed by a tribunal once constituted, even appointing a tribunal may prove challenging if the ad hoc arbitration agreement is defective.
Second
Second, ad hoc arbitration depends for its full effectiveness on cooperation between the parties and their lawyers.
This appears mostly at the beginning of an arbitration, where the proceedings can be delayed for example, if a party refuses to appoint an arbitrator, forcing the other party to rely on the law and potentially the courts of the seat of the arbitration to constitute the tribunal.
Moreover, it can also be delayed during proceedings with regard to procedural decisions, like admitting evidence.
Third
Disputes may arise between the parties, or between the parties and the tribunal, in relation to arbitrators’ fees and expenses.
Fourth
Awards may lack credibility if not associated with an arbitral institution, this is of particular importance if enforcement will be sought internationally, or through foreign courts.
Fifth
Some jurisdictions do not recognize ad hoc arbitration as a legitimate form of dispute resolution. In particular, an arbitration in China will not be valid unless it is administered by an ‘arbitration commission’.