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What Are the Benefits of Ad Hoc Arbitration?


Arbitration specialist Rishabh Jogani outlines these risks and whether ‘ad hoc’ arbitration is worth braving them.

What defines ‘ad hoc’ arbitration, and how does it differ from more typical varieties of arbitration?

Ad hoc arbitration is a form of arbitration in which the parties and the arbitrator mutually decide on the rules and procedures of the arbitration without the involvement of an arbitral institution. It allows parties to conduct the arbitration in their own way, giving them greater flexibility and independence but less assistance.

By contrast, institutional arbitration is where the parties designate an institution (such as the ICC or LCIA) to handle the arbitration. An institution will usually help the parties in their arbitration, from appointing an arbitrator to establishing procedural rules and enforcing the final award as provided in the arbitration agreement.

Contracting parties may find the notion of adopting their own rules and managing disputes enticing. However, there are many risks associated with this.

In terms of those risks, how does an absence of oversight from an arbitral institution affect the dispute resolution process?

Ad hoc arbitration can provide parties with more leeway in making their own decisions. Moving away from the norms of highly recognised institutions has its risks.

Ad hoc arbitration strongly depends on the parties’ willingness to co-operate. If one party attempts to hinder the procedures (e.g. fails to appoint an arbitrator or challenges the independence or impartiality of an arbitrator), the stalemate position normally demands the involvement of a state court. As a result, the efficiency of ad hoc arbitration is heavily reliant on ‘an appropriate judicial system at the place of arbitration’ which offers sufficient and prompt support if required.

Furthermore, establishing procedural rules in ad hoc arbitration may be challenging. If the parties fail or are unable to agree on the procedure, the default rules of the arbitral seat are always available. Those rules are often quite generic. As a result, the arbitral tribunal will play a major role in deciding procedural issues, making the arbitration rather unpredictable. Therefore, parties need to ensure that they appoint arbitrators who have a good understanding of the arbitral process.

Ad hoc arbitration strongly depends on the parties’ willingness to co-operate.

What benefits can ad hoc arbitration offer to participants?
  1. Flexibility – One significant advantage of ad hoc arbitration is its flexibility. The parties will mutually determine the rules that will govern their arbitration proceedings.
  2. More responsibility 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. Cost-effective – Another important advantage of ad hoc arbitrations is that the parties will only have to assume the fees of the arbitrator and their attorneys. The fees that would normally go to the arbitration institution will be saved by the parties. This can also turn out to be cost-effective for small value claims since institutions have a minimum fee that they normally charge per case.
What potential drawbacks should be taken into account?
  1. The tribunal is required to frame detailed guidance on all issues. Given that there are no institutional rules to guide the process, the arbitral tribunal will need to issue guidance on several key issues.
  2. Approaching the courts might be necessary. In the event that a party refuses to cooperate with the arbitration process (by refusing to appoint its nominee arbitrator or agree on the sole arbitrator, for example), recourse to courts becomes necessary. In an institutional arbitration, the institution carries out this function.
  3. Awards can lack credibility. Institutions like the ICC do their own internal review of the awards with the tribunal. This helps in ensuring that the awards are not made with glaring procedural errors. There is no such process for an ad hoc arbitration.
  4. Consolidation of related disputes. Many institutional rules provide for consolidation of arbitrations arising under different contracts. This may not be possible for an ad hoc arbitration without consent of both parties or court involvement.
  5. Emergency procedure. Sophisticated institutional rules provide for the appointment of an emergency arbitrator who can issue interim relief pending the formation of the tribunal. This is simply not possible for an ad-hoc arbitration and recourse to a national court becomes mandatory.
  6. 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.
Are there any particular kinds of dispute – such as investor disputes or those within the construction sector, for instance – that might be more drawn to ad hoc arbitration than others?

Usually, state parties are concerned that a submission to institutional arbitration may devalue their sovereignty, particularly when the disputes involve public interest and large sums of public money. Thus, in disputes within any such sector where a state is a party, ad hoc arbitration is preferred. However, for construction arbitration I believe that institutional arbitration under the ICC rules is very common.

What should less experienced legal counsel be mindful of when preparing to engage in ad hoc arbitration?

I think there are two major things that should be considered:

First, while nominating arbitrators, counsel should advise its client to nominate a sufficiently experienced arbitrator. This is to ensure that the tribunal’s experience can guide the process in the absence of institutional rules.

Second, legal counsel should also make sure that they inform the tribunal of any important legal requirements for an award to be considered valid. This is particularly important if the tribunal is comprised of individuals qualified in other jurisdictions than the governing law.

How can parties best ensure that they come to an agreement on the procedural rules of an ad hoc arbitration?

Given the nature of ad hoc arbitration, it is unlikely that procedural rules can be applied without consent of the parties or the directions of the tribunal. Parties should agree on a detailed procedural order and potentially request that the tribunal issue detailed directions.

Under what circumstances might you recommend that parties forgo ad hoc arbitration in favour of institutional arbitration?

I personally believe that institutional arbitration is generally far more efficient than an ad hoc arbitration. Therefore, I would suggest that parties try to adopt institutional arbitration as much as possible, particularly for high-value cases.

 

Rishabh Jogani, Partner

MRP Advisory LLC

6th Floor, Concord Towers, Dubai Media City, PO Box 126732, Dubai, UAE

Tel: +971 58-655-9293

E: Rishabh.Jogani@mrp-advisory.com

 

Rishabh Jogani is an India-qualified lawyer who represents clients in both domestic and international arbitration. His specialisations include construction law, shareholder disputes, intellectual property law issues, debt recovery claims and real estate matters. He has conducted numerous ad hoc arbitrations as well as arbitrations under the ICC, LCIA and SIAC institutional rules, and has represented clients under Indian, English, Singaporean, Kazakhstani and Sudanese law.

MRP Advisory is a boutique UAE-based law firm that provides specialised legal solutions for issues relating to infrastructure, construction and engineering. MRP advises its international clients on a range of disputes, including payment defaults, liquidated damages, extension of time claims, maintenance liability and defects, terms of agreement breaches and many more.





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