Pros and Cons of Institutional and Ad Hoc Arbitration

Being one of the main forms of ADR, arbitration is all about having one’s dispute resolved by an independent arbitrator, and not a traditional judicial body.

The parties resolve their differences through arbitration that hands down a verdict which is legally binding for both of them.

There are two kinds of arbitration - institutional and ad hoc, both of which can be resorted to to settle commercial disagreements on an internal arena. This article will be looking into the pros and cons of both of them. 

Institutional Arbitration

Institutional arbitration gets administered by international arbitration institutions, each of which has its own procedural rules for settling disputes. The most noteworthy of them include London-based LCIA, ICC, Dubai-based DIFC, and Dubai-based DIAC.

Some arbitrators specialize in specific spheres of commercial interests. Before a dispute arises, the parties agree on an arbitration institution they will be applying to to resolve their disagreements. For that purpose a special clause is included in the arbitration agreement. 

The pros of institutional arbitration include:

• a predefined set of rules of arbitration procedure
• administrative support provided by secretariat or other arbitration bodies
• possibility to select a properly qualified arbitrator
• court assistance in getting parties involved in arbitration 
• predefined format of arbitration procedure 

The cons of institutional arbitration include: 

• steep administrative costs 
• excessive bureaucratic barriers  
• impossible dealines

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Ad Hoc Arbitration

The idea behind is that the parties get to pick an arbitrator that is not part of any arbitration institution. The arbitrator administers arbitration procedure by taking into consideration the rules of their own making. 

Initiating ad hoc procedure requires the parties to include a respective clause in their arbitration agreement. The clause is to be formulated in the following way: ‘All disputes arising between the parties will be settled through arbitration’. The parties will be free to select the number of arbitrators and applicable legislation. Also, the clause may contain information on the venue of arbitration, which may affect applicable legislation during conflict resolution. 

The pros of ad hoc arbitration include:

•  relatively low arbitration costs
•  procedural flexibility

The cons of ad hoc arbitration include: 

• a risk that the parties may fail to agree on applicable arbitration procedure and arbitrator
• an arbitrator’s fee (neither of the parties would want to ‘upset’ the arbitrator by paying them a fee that is below their expectations)

Low arbitration costs coupled with other pros discussed above makes ad hoc arbitration a popular form of ADR. However, quite a few commercial entities or individuals tend to prefer institutional arbitration as a way of resolving their disagreements.

They explain their choice by citing predefined arbitration procedure which makes the entire process more predictable and devoid of any eventualities (even though it may be far costlier that ad hoc arbitration).  

Therefore, institutional procedure is the best option for large businesses that come from different jurisdictions. 

Choosing the proper form of arbitration ultimately depends on a number of factors, including the nature of the dispute and the intentions of the parties.