DEFINITION OF ARBITRATION
Arbitration is a form of alternative dispute resolution which allows disagreements between two parties to be resolved outside of the traditional court system.[1] In an arbitration case the parties to a dispute will refer it to one or more persons - known as the 'arbitrators' or an 'arbitral tribunal' - by whose decision or award they agree to be bound. Arbitration is often used to resolve commercial disputes, particularly in the context of international commercial transactions.
The arbitral tribunal comprises one or more independent individuals selected by the parties or appointed through a mechanism that the parties have agreed upon.[2] An arbitral tribunal’s substantive decision is called an award. Awards in international arbitrations are not subject to any appeal (save in a very limited number of jurisdictions) and can be enforced under both domestic and international enforcement regimes including, notably, the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The parties to an arbitration are free to agree on whether to use the Rules of the ICC International Court of Arbitration, the rules of another arbitral institution or no rules at all. Arbitration is the only alternative to court litigation for achieving a final, binding and enforceable resolution of a dispute. Due to its numerous advantages over litigation, arbitration has become the preferred and most widely used mechanism for resolving international commercial disputes.
International arbitrations may be either “Institutional” or “Ad Hoc”. There are theoretical and practical differences between these two forms of arbitration.[3] However, this article compare the differences between institutional and 'ad hoc' arbitration methods, and the advantages and disadvantages of each.
One of the choices parties must make when they decide to arbitrate is whether they want to arbitration to be administered by an arbitral institution, or whether they want the arbitration to be ad hoc.[4]Ad hoc arbitration is a proceeding that is not administered by others and requires the parties to make their own arrangements for selection of arbitrators[5] and for designation of rules, applicable law, procedures and administrative support. Provided the parties approach the arbitration in a spirit of cooperation, ad hoc proceedings can be more flexible, cheaper and faster than an administered proceeding. The absence of administrative fees alone make this a popular choice.
The arbitration agreement, whether arrived at before or after the dispute arises, might simply state that "disputes between the parties will be arbitrated", and if the place of arbitration is designated, that will suffice. If the parties cannot agree on arbitral detail, all unresolved problems and questions attending implementation of the arbitration, for example "how the arbitral tribunal will be appointed", "how the proceedings will be conducted" or "how the award will be enforced" will be determined by the law of the place designated for the arbitration, i.e., the "seat" of the arbitration. Such an abbreviated approach will work only if the jurisdiction selected has an established arbitration law. The ad hoc proceeding need not be entirely divorced from its institutional counterpart. Oftentimes the appointment of a qualified and/or impartial arbitrator (actual or perceived) constitutes a sticking point in ad hoc proceedings. In such case, the parties can agree to designate an institutional provider as the appointing authority. Further, the parties can at any time in the course of an ad hoc proceeding decide to engage an institutional provider to administer the arbitration.
Parties wishing to include an ad hoc arbitration clause in the underlying contract between them, or seeking to arrive at terms of arbitration after a dispute has arisen, have the option of negotiating a complete set of rules, establishing procedures which fit precisely their particular needs. Experience has shown that this approach can require considerable time, attention and expense without providing assurance that the terms agreed will address all eventualities.
Other options available to parties wishing to proceed ad hoc, who are not in need of rules drawn specially for them, or of formal administration and oversight, include: (i) adaption of the rules of an arbitral institution, amending provisions for selection of the arbitrator(s) and removing provisions for administration of the arbitration by the institution, (ii) incorporating statutory procedures such as the United States Federal Arbitration Act (or applicable state law) or the English Arbitration Act 1996, (iii) adopting rules crafted specifically for ad hoc arbitral proceedings such as the UNCITRAL Rules[6] (U.N. Commission on International Trade Law) or CPR Rules (International Institute for Conflict Prevention and Resolution), which may be used in both domestic and international disputes, and (iv) adopting an ad hoc provision copied from another contract.[7] Risks accompanying two of the available options are worthy of particular note.
Incorporating rules drawn by an institutional arbitration provider, amending provisions for appointment of the arbitrator and excising provisions requiring administration by the provider, carries with it the risk of creating ambiguities in the institutional rules as amended, despite efforts to redraw them to suit an ad hoc proceeding. It is also possible that in the adaptation process the parties may inadvertently create an institutional process. Copying an ad hoc arbitration clause from another contract may also result in later grief if the purloined clause was originally crafted for a particular, possibly unique, set of circumstances and/or was drafted taking into account different applicable arbitration law.
Properly structured, ad hoc arbitration should be less expensive than institutional arbitration and, thus, better suit smaller claims and less affluent parties. Ad hoc arbitration places more of a burden on the arbitrator(s), and to a lesser extent upon the parties, to organize and administer the arbitration in an effective manner. A distinct disadvantage of the ad hoc approach is that its effectiveness may be dependent upon the willingness of the parties to agree upon procedures at a time when they are already in dispute. Failure of one or both of the parties to cooperate in facilitating the arbitration can result in an undue expenditure of time in resolving the issues. The savings contemplated by use of the ad hoc arbitral process may be somewhat illusory if delays precipitated by a recalcitrant party necessitate repeated recourse to the courts in the course of the proceedings.
A properly structured ad hoc arbitration should be more cost effective, and therefore better suited to smaller claims and less wealthy parties. The ad hoc process places a heavier burden on the arbitrator to organize and administer the arbitration. A distinct disadvantage of the ad hoc process is that its effectiveness is dependent on how willing the parties are to agree on the arbitration procedures at a time when there may already be a dispute. The failure of one or both parties to fully cooperate can result in time spent resolving issues or an ultimate recourse to court. A primary advantage of the ad hoc process is its flexibility, enabling the parties to decide the dispute resolution procedure themselves. [8]However, this will of course require a greater degree of effort, cooperation and expertise from the parties to determine the arbitration rules. Often the parties may misunderstand each other if they are different nationalities and come from different jurisdictions, and this can cause delays. Again, once a dispute has arisen this may frustrate the parties' intention to resolve the dispute on an ad hoc basis.
Such situations can be avoided if the parties agree that their arbitration should be conducted under certain arbitration rules. This will result in reduced deliberation and legal fees, and parties will be able to begin proceedings early as they will not have to engage in negotiating specific rules. The United Nations Commission on International Trade Law (UNICITRAL) Arbitration Rules, revised in 2010, are among the most suitable rules for this purpose.[9]
Another reason why ad hoc arbitration is less expensive than institutional arbitration is that the parties will only have to pay fees for the arbitrators, lawyers or representatives and the costs incurred in conducting the proceedings rather than paying fees to an arbitration institution. If the amount in dispute is considerable, these fees can be prohibitively expensive. In order to reduce costs, parties and the arbitrators may agree to conduct the arbitration at the arbitrator's office.
The arbitrator’s fees will be negotiated directly between the parties and the arbitrators, allowing them the option to negotiate, whereas in institutional arbitration the arbitrators' fees will be set by the institution. The disadvantage here is that this can involve an uncomfortable discussion and, in certain cases, the parties may not be able to negotiate a fee reduction. The arbitrators are the 'judges' in the case and no party would wish to upset the judge, particularly before the proceedings have even commenced.
Parties wishing to include an ad hoc arbitration clause in the underlying contract between them, or seeking to agree the terms of arbitration after a dispute has arisen, have the option of negotiating a complete set of rules which meet their needs. However, this approach can require considerable time, attention and expense with no guarantee that the terms eventually agreed will address all eventualities. Furthermore, if parties have not agreed on arbitration terms before any dispute arises they are unlikely to fully cooperate in doing so once a dispute has arisen.
As we have seen, bodies such as UNICITRAL have rules available which are designed specifically for ad hoc proceedings. Other options available to parties wishing to proceed in this way, who are not in need of rules drawn specifically for them, include:
These options all carry certain risks. For example, where rules drawn up by an institutional provider are incorporated into ad hoc proceedings existing provisions which require administration by the provider - such as making appointments - will need to be amended or excluded. This runs the risk of creating ambiguities, or of the parties unintentionally creating an institutional process.
As international commercial arbitration has grown and expanded with the growth of international business, arbitral institutions have also grown and changed.[10] Instıtutıonal arbitrations are administered by specialized arbitral institutions. A number of organizations provide institutional arbitration services for international users, sometimes tailored to particular commercial or other needs. The best-known international commercial arbitration institutions are the International Chamber of Commerce (ICC)[11], the American Arbitration Association (AAA) and its International Centre for Dispute Resolution (ICDR), the London Court of Internatıonal Arbitration (LCIA), and the Singapore International Arbitral Centre (SIAC).
These arbitral institutions have promulgated sets of procedural rules that apply where parties have agreed to arbitration pursuant to such rules, typically by incorporating such rules in their arbitration agreements. These rules set out the basic procedural framework for arbitral proceedings and typically authorize the arbitral institution to assist in selecting arbitrators in particular disputes (that is, to serve as “appointing authority”), to resolve challenges to arbitrators and to review the arbitrator’s awards to reduce the risk of unenforceability. Each institution has a staff, with the size varying significantly from one institution to another, and a decision-making body.
It is fundamental that arbitral institutions do not themselves arbitrate the merits of the parties dispute. This is the responsibility of the individuals selected by the parties or institution as arbitrators. In practice, arbitrators are almost never employees of the arbitral institution, but instead are private persons selected by the parties. If parties cannot agree upon an arbitrator, most institutional rules provide that the host institution will act as an “appointing authority,” to choose the arbitrators in the absence of the parties agreement.
Institutional arbitration saves parties and their lawyers the effort of determining the arbitration procedure and of drafting an arbitration clause, which is provided by the institution. Once the parties have selected an institution, they can incorporate that institution's draft clause into their contract. Arbitration clauses can be amended from time to time by the institution, drawing on experience in conducting arbitrations regularly, and ensures there is no ambiguity in relation to the arbitration process.
An institution's panel of arbitrators will usually be made up of experts from various regions of the world and include many different vocations. This allows parties to select an arbitrator possessing the necessary skill, experience and expertise to provide a quick and effective dispute resolution process. It should be noted, however, that the parties merely nominate an arbitrator - it is up to the institution to make an appointment and the institution is free to refuse an appointment if it considers that the nominated arbitrator lacks the necessary competence or impartiality. A further benefit of institutional arbitration is that the parties and arbitrators can seek assistance and advice from institutional staff. In a less formal ad hoc arrangement, parties to the arbitration would have to approach the court in order to take the arbitration forward and this would inevitably incur further expenditure.
One of the perceived advantages of arbitration generally is that it provides a final and binding award which cannot be appealed. However, there is an inherent risk that a mistake made by a tribunal could not be rectified at a later stage. To counterbalance this risk, some institutional rules provide for scrutiny of the draft award before the final award is issued. A dissatisfied party could then appeal to an arbitral tribunal of second instance which would be able to confirm, vary, amend or set aside the draft award. Less formal processes provide no such option.
Both institutional and ad hoc arbitration have strengths. Institutional arbitration is a conducted under a standing set of procedural rules and supervised by professional staff. As a practical matter, this reduces the risks of procedural breakdowns, particularly at the beginning of the arbitral process, and of technical defects in the arbitration proceedings and award. The institution’s involvement can be particularly constructive in the appointment of arbitrators, challenges to arbitrators, selection of an arbitral seat and fixing of arbitrator’s fees where specialized staff provide better service than ad hoc decisions by national courts with little experience in such matters.[15] Equally important, many provisions concerning competence-competence, separability, provisional measures, disclosure, arbitrator impartiality, corrections and challenges to awards, replacement of arbitrators and costs.
On the other hand, ad hoc arbitration is arguably more flexible and potentially more confidential than institutional arbitration. Moreover, the growing size and sophistication of the international arbitration bar and the efficacy of legal regimes for arbitration arguably reduces the advantages of institutional arbitration.
In reality, an ad hoc arbitration may not prove to be less expensive than the institutional process. [16]Firstly, the parties are required to make arrangements to conduct the arbitration but they may lack the necessary knowledge and expertise. Arbitrations are generally conducted by people who are not lawyers - however, this may result in misinformed decisions especially in international commercial arbitration.
Secondly, where there is lack of cooperation between the parties or delay on the part of the tribunal conducting the arbitration or writing the award, a party may need to seek court intervention. Litigation costs would not only negate the cost advantages of ad hoc arbitration, but also the parties' intention to avoid the courts through alternative dispute resolution methods.
Lastly, in complex cases the tribunal may seek to appoint a secretary to deal with the considerable administrative work involved. The additional costs of the secretary's fees will add to the cost burden of the arbitration.
It is said that parties are the masters of arbitration. The short answer from this author’s perspective, trying to wear both the arbitrator’s and counsel’s hat, is that institutional arbitration is generally preferable to ad hoc and that if ad hoc is chosen, the UNCITRAL Rules should be referred to.[17] However, this is questionable in institutional arbitration, where the institution effectively acquires the parties' powers to make decisions - such as the appointment of arbitrators – and can impose their will upon the parties. This seems against the spirit of arbitration. Although ad hoc arbitration may seem preferable in today's modern and commercially complex world, it is really only suitable for smaller claims involving less affluent parties in domestic arbitrations.
In the context of international commercial disputes, institutional arbitrations may be more suitable - despite being more expensive, time consuming and rigid. The institutional process provides established and up to date arbitration rules, support, supervision and monitoring of the arbitration, review of the awards and strengthens the awards' credibility. The particular circumstances of the parties and the nature of the dispute will ultimately determine whether institutional or ad hoc arbitration should prevail.
KAYNAKÇA [1] YEĞENGİL, s. 91. [2] 9 ŞANLI, C. : Milletlerarası Ticari Tahkimde Esasa Uygulanacak Hukuk, Ankara 1986, s. 24; AKINCI, Z. :Milletlerarası Tahkim, Ankara 2003, s. 27-28 [3] Gary B. Born, International Commercial Arbitration, (Kluwer Law International, 2014), p.26 [4] Ad hoc arbitration is not an option in China. See Jingzhou Tao & Clarisse von Wunschheim, Article I6 and I8 of the PRC Arbitration Law- The Great Wall of China for Foreign Arbtiration Institutions, 23 Arb. Int. 309, 324 (2007) [5] Art. 3, UNCITRAL Arbitration Rules [6] BALCI, s. 109; ŞANLI, s. 96 [7] ŞANLI, s. 98-99 [8] Art. 17, UNCITRAL Arbitration Rules [9] The UNCITRAL Arbitration Rules have been updated, effective August 15, 2010. Available at https://www.uncitral.org/pdf/english/texts/arbitration/arb-rules-revised/arb-rules-revised-2010-e.pdf [10] The international caseload of major arbitral institutions nearly doubled between 1993 and 2003 and, during the same period, more than tripled before the American Arbtiration Association and its İnternational Centre of Dispute Resolution. See Christopher R. Drahozal & Richard W. Naimark, TOWARDS A SCIENCE OF INTERNATIONAL ARBITRATION: COLLECTED EMPRICAL RESEARCH, 341, app.ı (2005) [11] Ibid [12] Some institutions, such as the LCIA, apply hourly fees. [13] Art. 41, UNCITRAL Arbitration Rules [14] The new ICC Rules expressly provide in their Article 1(2) that the Court is the only body authorized to administer arbitrations under the Rules, including the scrunity and approval of awards rendered in accordance with the Rules. [15] Gary B. Born, International Commercial Arbitration, (Kluwer Law International, 2014), p.126-127 [16] According to statistics provided by the ICC, the institution’s administrative expenses were approximately 2% of the total costs of arbitration in cases that went to a final award in 2003 and 2004. See Techniques for Controlling Time and Cısts in Arbitration, Report from the ICC Comission on Arbitration 2007. [17] Conference: “Trends and Features in International Arbitration held in Oslo on 6 May 2010.