Ad Hoc and Institutional Arbitration

Chapter 4
Ad Hoc and Institutional Arbitration

Basic Notions

As discussed in Chapter 1, the decision of the parties to select arbitration as a method of resolution of their dispute is affected by different kinds of considerations. A further choice to be made is a decision on type of arbitration best serving the interests of the parties.

Two types of arbitration – ad hoc and institutional (administered) – can be distinguished on the basis of the method of their respective administration. In the latter, proceedings are managed by an established institution, and routinely pursuant to that institution’s pre-existent rules of procedure. Such an agency can specialize solely in offering arbitration services or it can propose them among other functions performed within its scope of activity.

In ad hoc arbitration no such allocation of administrative authority takes place and the parties are exercising their right to devise and determine the rules of procedure on their own. They can achieve that either by contractually designing a set of rules for a specific purpose of a particular arbitration, or by opting for already-existing rules of procedure (such as the UNCITRAL Arbitration Rules), or by transferring the rights to regulate the procedure upon the arbitral tribunal.

Ad Hoc Arbitration

General Characteristics

While examining the advantages of ad hoc arbitration, Alan Redfern remarks that if a dedicated and successful cooperation between the parties and their counsel over a task of formulating specific rules of procedure is accomplished, ‘the difference between an ad hoc arbitration and an institutional arbitration is like the difference between a tailor-made suit and one which is bought off the peg.’1 This potential for modelling the procedure in order to accommodate the individual needs of the parties and specific demands of a particular case is the most commonly emphasized benefit of ad hoc arbitration. The level of control which the parties keep over the course of proceedings is in this form particularly high.2

Financial efficiency and expedition of the proceedings are also invoked as the factors endorsing the choice of ad hoc arbitration. The parties selecting this form for their dispute resolution avoid the risk of delays resulting from the fulfilment of internal administrative standards of arbitral institutions, where the wheels of justice might turn at a slower pace.

It is also worth observing that the argument that ad hoc proceedings are more economical than the ones organized by an arbitral institution might not always be accurate. Gerald Aksen notices that the costs saved by opting for ad hoc arbitration are

those of administering agency itself, but not the usually far larger legal and arbitrators’ fees. Moreover, since most international institutions are now facing substantial competition from other arbitral bodies, transnational businesses are enjoying the benefit of lower and more reasonable fees.3

The introduction of capped fees for administration of proceedings by many arbitral institutions reflects such effort towards overcoming the negative image of overpriced services. The eventual overall cost of ad hoc arbitration is in practice a result of the negotiation skills of specific parties (as well as arbitrators) and is consequently much more difficult to estimate. Its relative efficiency depends also on which arbitral institutions are being compared; that is, the services of those organizations which the parties would take into account as an alternative to ad hoc proceedings.

Another possible factor is an occasional inability of the parties to reach a common decision as to the arbitral institution which should resolve their case. Under such circumstances, ad hoc arbitration might turn out to be the only compromise the parties are able to achieve.

Finally, arbitral institutions frequently provide their own internal mechanisms of review of the issued awards. For the parties demanding a particularly expeditious resolution of their controversy this may lead to unwelcome, obstructing effects. The choice of the ad hoc form of arbitration enables them to avoid undesirable delays. However, as Thomas J. Stipanowich observes, the advantages of arbitration can also, under certain circumstances, be perceived as its weak points.4 This argument is relevant in the context of specific features of ad hoc arbitration as well. The lack of easily accessible institutional control may also work to the disadvantage of the parties, increasing the risk of rendering flawed decisions. The parties, dissatisfied with an award will be left with the possible (but also, under the New York Convention provisions, remarkably limited) recourse to the domestic court.

UNCITRAL Arbitration Rules and Ad Hoc Arbitration

The main risk connected with choosing this form of arbitration seems to be that of ‘reinventing the wheel’5 through recurrent efforts of the parties and their counsel to draft rules of procedure and solve problems already successfully managed before. An opportunity to have a controversy resolved according to the indeed ‘tailor-made’ procedural standards seems decisive for only a fraction of all parties involved in international commercial disputes. In most cases time and effectiveness are the factors particularly compelling to the parties potentially interested in ad hoc arbitration.

As a consequence, introduction of ‘ready-made’ sets of rules of procedure, suitable for the needs of ad hoc decision-making, turned out to be a successful initiative. Adoption by UNCITRAL on 28 April 1976 of the UNCITRAL Arbitration Rules has been indicated as a breakthrough in this regard. The UNCITRAL Rules have become an instrument fit for ad hoc arbitrations as well as for administered ones. Still, as it is a common practice of arbitral institutions to issue their own procedural regulations, the significance of the UNCITRAL Arbitration Rules is very much that of a document upon which the parties may easily agree in the absence of institutional support.

In drafting the UNCITRAL Rules, the expert committee collaborated extensively with arbitral institutions. A formal cooperation was also established between UNCITRAL and a private organization, the International Commission on Commercial Arbitration (ICCA). The subsequent influence of UNCITRAL’s work on procedural regulation of arbitral institutions, though evident, is rather indirect: Howard M. Holtzmann remarks that

most modern institutional rules resonate with strong echoes of the UNCITRAL Rules, and some, indeed, include key provisions identical to the UNCITRAL text. Further, some new arbitration centers adopt the UNCITRAL text as their institutional rules.6

Additionally, many arbitral institutions

allow the parties to opt for UNCITRAL Rules instead of their own arbitration rules, and still offer full administration services. Those institutions include, inter alia, American Arbitration Association (‘AAA’), London Court of International Arbitration, Stockholm Chamber of Commerce, Arbitral Center of the Federal Economic Chamber of Austria in Vienna … Support from several other institutions is limited to serving as the appointing authority: e.g, the International Chamber of Commerce (‘ICC’), the Netherlands Arbitration Institute, and Zurich Chamber of Commerce.7

The functional success of the UNCITRAL Arbitration Rules can also be seen in the fact of their use for the resolution of controversies falling outside their intended primary scope of application, such as investment treaty cases. Paul D. Friedland and Lucy Martinez point out that besides the ad hoc resolved commercial cases, the UNCITRAL Rules have been used for numerous arbitrations under bilateral or multilateral investment treaties, as well as preferential trade and investment agreements,8 including cases resolved by the Iran–US Claims Tribunal and investor–government disputes under NAFTA.

They have also been used as a default set of rules of procedure by some permanent arbitral institutions, including, notably, the Hong Kong International Arbitration Centre (HKIAC). They were adopted as the default rules of procedure for international arbitrations administered by HKIAC with the intention to support parties who ‘seek the formality and convenience of an administered arbitration while maintaining the flexibility afforded by the UNCITRAL Arbitration Rules (Rules)’.9 They were applied until the issuance of the Centre’s own HKIAC Administered Arbitration Rules in September 2008 (and are still recommended by this Centre for ad hoc arbitrations10). While the intended, primary function of UNCITRAL Arbitration Rules, as adopted in 1976, was to provide an effective instrument for ad hoc commercial arbitrations, its widespread reception, also outside its main scope of application, confirms the practical utility of this instrument.

The UNCITRAL Arbitration Rules are the most successful example of a standard procedural regulation serving the purposes of ad hoc arbitrations. Several private institutions, such as the International Institute for Conflict Prevention and Resolution, have followed this route by drafting their own rules of procedure for ad hoc cases. The first version of Rules for Non-Administered Arbitration (the CPR Rules – originally Rules and Commentary for Non-Traditional Arbitration for Business Disputes) was adopted in 1989. They were principally aimed at application in domestic ad hoc arbitrations, although their use in international disputes has not been excluded. In 1992 the separate CPR Rules for Non-Administered Arbitration of International Disputes (the CPR International Rules) and the Commentary were introduced and subsequently amended (with the most recent version being in force since 200711).

As explicated in the Commentary to the CPR International Rules, also in the cases involving persons or business enterprises of different nationalities or located in different countries, as well as contracts with a foreign element, ‘[w]here parties have provided for CPR arbitration generally, without specifically identifying which CPR arbitration rules shall apply, the general CPR Rules for Non-Administered Arbitration (the “Rules”) shall apply.’12

One of the most important solutions, adopted in the CPR International Rules and not finding a direct counterpart in the general Rules, is their suitability for multi-party disputes. Thus, the CPR International Rules seem particularly adequate for complex, international ad hoc arbitrations. They also provide an example of a trend towards developing arbitral rules of procedure meant to be adjusted to the demands of more compound cases, previously better accommodated by litigation.

The same tendency can be found in the recent version of the UNCITRAL Arbitration Rules, which underwent a major process of revision in 2006 to 2010. The outcome of its process – the 2010 edition – contains new (and much awaited) provisions on, among other things, multi-party proceedings, joinder (but, remarkably, not consolidation) and liability, as well as a number of procedural modifications, including reviewed mechanisms for introduction of interim measures. The resulting, amended version of the UNCITRAL Rules thus seems suitable for application in the conditions that have changed over the first thirty years of use of this instrument. Whether the adopted changes will help in broadening the range of ad hoc arbitration from a method considered to be ‘suitable for experienced parties only’13 to a wider spectrum of cases remains be proven.

Institutional Arbitration

According to Hans Smit, the most frequently mentioned advantages of administered arbitration are the following:

(1) it provides procedures for selection of the arbitrators; (2) it provides rules of procedure for conducting the arbitration; (3) it may provide, at least to some extent, rules for deciding the merits of the dispute; (4) it may provide facilities for the arbitrators, such as hearing rooms and administrative assistance; and (5) it may provide a measure of supervision over the arbitrators.14

These factors and their actual significance in arbitration will be further discussed in turn in this chapter.

Of the four elements listed by Smit, the availability of pre-existing procedural mechanisms has already been mentioned as an important consideration, affecting the choice of a particular form of dispute resolution. The personal selection of arbitrators (or selection of the procedure of their appointment, including their possible assignment by a third party), as well as designing individually modelled rules of procedure, both require a cooperation of the parties much closer than is needed in case of a simple agreement upon a choice of a particular arbitral institution.

In fact the decision on having a dispute arbitrated ad hoc or institutionally is a consequence of balancing the values and goals which both parties would like to achieve. It also depends upon the actual readiness of the parties to collaborate in the efforts towards resolution of their controversy and the practical feasibility of such cooperation. The objectives, frequently appearing as contradictory or requiring a decision on giving a clear preference to one of them, are time effectiveness and absence of unnecessary institutional burdens on one hand and a guarantee of procedural accuracy, clarity and control on the other.

As demonstrated above, time- and cost-efficiency are most commonly mentioned as most significant benefits of ad hoc arbitration. The possibility of designing ‘custom-tailored’ rules of procedure for a particular case seems appealing, yet applicable to a rather limited extent to highly specialized contracts and by parties fully conscious of their procedural demands and expectations. Establishment of an entirely new set of rules of procedure may be also time-consuming and requires a consensus by the parties, often difficult to achieve in the circumstances of an already open controversy. These obstacles can be overcome by choosing already-existing rules of procedure, appropriate for non-administered arbitration, and accepted by the parties either as a whole or with agreed upon modifications.

From this perspective, institutional arbitration may seem as an unnecessary formalization of a flexible mechanism of dispute resolution. This can be distinctly observed in larger cases (which have been defined by the AAA as involving claims of at least $500,00015), where the lack of flexibility often seriously affects the speed of dispute resolution. The decisions by the parties to choose an ad hoc form of arbitration can be thus interpreted as directly resulting from a need for omitting an additional level of redundant structure and rigidity.16

Many arbitral institutions have reacted to these reservations by granting a broader discretionary power to arbitrators in regard to the determination of applicable rules of procedure. According to the LCIA Rules (Article 14.2):

Unless otherwise agreed by the parties under Article 14.1, the Arbitral Tribunal shall have the widest discretion to discharge its duties allowed under such law(s) or rules of law as the Arbitral Tribunal may determine to be applicable; and at all times the parties shall do everything necessary for the fair, efficient and expeditious conduct of the arbitration.

Analogical powers have been vested in the Arbitral Tribunal by virtue of Art. 15 of the ICC Rules of Arbitration.

It is worth remarking that the increasingly popular voie directe competence, regarding the determination of substantive rules to be applied to the merits of a dispute, finds its procedural counterpart in recent regulations issued by several arbitral institutions. According to Art. 20.1 of the 2006 VIAC Rules of Arbitration and Conciliation (Vienna Rules), the sole arbitrator (arbitral tribunal) may conduct the arbitration proceedings at his (its) absolute discretion, with the regard to the principle of equal treatment of the parties and the right to be heard being ensured at every stage of the proceedings. Correspondingly, Art. 19 (1) of the 2007 Stockholm Chamber of Commerce Arbitration Rules (SCC Rules) provides that, subject to these rules and any agreement between the parties, the Arbitral Tribunal may conduct the arbitration in such manner as it considers appropriate.

The 2008 HKIAC Administered Arbitration Rules (Art. 14.1) offer a more stringent version of this competence, stating that the tribunal shall adopt suitable procedures so as to avoid unnecessary delay or expenses, provided that equal treatment of the parties is ensured, and the parties are given reasonable opportunity to present their case (see also the provision of Art. 33.1 of the CIETAC Rules, notably modified by introduction of oral hearings as a default option under Art. 33.2). Similarly, an arbitral tribunal resolving the case under the 2008 AAA International Arbitration Rules, may, according to Art. 16, conduct the arbitration in whatever manner it considers appropriate, provided that the parties are treated with equality and that each party has the right to be heard and is given a fair opportunity to present its case. It is also obliged to proceed with a view to expediting the resolution of the dispute. In 1996 AAA has established the International Centre for Dispute Resolution, entrusted with exclusive administration of all of the AAA’s international matters.

Moreover, at AAA the implementation of the Supplementary Procedures for Large, Complex Commercial Disputes was oriented at fulfilling the demands of the parties in such cases, regarding the expertise criteria as well as efficiency requirements. George H. Friedman characterizes the foundations of this AAA programme as:

(1) the selection of arbitrators that satisfy rigorous criteria to insure that the panel is an extremely select one, and the training, orientation and coordination of those arbitrators in a manner designed to facilitate the Program; (2) the establishment of new procedures for the administration of those cases that elect to be included in the Program; (3) the flexibility of those parameters so that parties may more speedily and efficiently resolve their disputes; and (4) administration of large, complex cases by trained, senior AAA staff.17

On the other hand, the recent tendency towards increasing institutional arbitration’s similarity to litigation (for example, by endorsing discovery, dispositive motions, provisional relief and reasoned awards18) can be perceived as an answer to the often complex and advanced demands of the parties involved in international trade disputes.