Globalization has paved way for the growth of numerous opportunities in the trade sector thereby promoting growth of transnational business. Thus, while business experience stiff competition in the global market, such an environment becomes vulnerable to commercial disputes. Sagartz (1998) noted that for the reason stated earlier, international commercial disputes can lead to major conflicts in trade. Further, the impact could bring about serious economic and political effects. Hence, the need to deal with any disputes that arise develops as conflicting parties seek to mitigate and manage the effects of an ongoing dispute. With such an understanding, companies can best solve disputes through fast and efficient techniques. Sagartz (1998) explained that the need to settle international commercial disputes “… is best satisfied through extra judicial means rather than litigation in national courts” (p. 675). The implication is that conflicting parties are likely to achieve the best results when they move away from the limitations of state law such as making the process of dispute resolution both lengthy and costly.
Describing the factors that international corporations consider when choosing a dispute resolution technique, Nigmatulllina (2016) emphasized on cost and efficiency. He explained that mediation and arbitration, as dispute resolution techniques, are not only cost-effective, but are also quick and help acquire a binding and internationally enforceable agreement between or among conflicting parties. While mediation is considered successful when conflicting parties have agreed on certain terms, arbitration is more like an informal court process. Two methods of arbitration are such as ad hoc and institutional arbitration. Comparatively, ad hoc arbitration allows conflicting parties to choose their arbitrators, while in institutional arbitration, a specialized institution is tasked with managing the arbitral process (French, 2013). In the context of international commercial disputes, parties ought to use the approach that best suits their interests in terms of being fair, quick, cost-effective and judicious especially in the international commercial setting. Therefore, a comparative review of both ad hoc and institutional arbitration techniques is warranted.
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Ad Hoc Arbitration
In this type of arbitration process, parties are free to make their own rules and structure how the proceedings will take place. The lack of an institution to administer the process means that the parties involved can chose the number of arbitrators as well as the manner in which they are appointed (Aliaj, 2016). The implication is that ad hoc arbitration provides conflicting parties with an opportunity to design rules, choose applicable law, and influence the nature of procedures and determine if and when administrative support is needed. There are a number of advantages associated with ad hoc arbitration. Some of these advantages are such as:
Flexibility
Ad hoc arbitration allows parties to make decisions about the procedure to be used when seeking a solution to a dispute. While such an aspect demands greater effort, cooperation and expertise from the parties, it allows the full exercise of party autonomy. Under arbitration, party autonomy is the principle that conflicting parties have the ability to decide the course of the arbitral process (Schroeter, 2017). Therefore, through ad hoc arbitration, parties are able to determine the degree of external influence, for instance, from administrative bodies. Schroeter (2017) described this particular process as being “… independent of all institutions, that are conducted without the benefit of an appointing and administrative authority or preexisting arbitration rules” (p. 146). Thus, parties using ad hoc arbitration enjoy a considerable degree of flexibility in terms of managing and setting out the terms of the proceedings.
Direct discussions of settlement fees
One of the factors that parties consider when entering into an arbitral process is the potential cost they are likely to incur. Thus, whether ad hoc or institutional, costs might undermine the success of dispute resolution (Nigmatullina, 2016). However, in ad hoc arbitration, parties have the opportunity of discussing fees with arbitrators directly. The implication is that parties only pay certain fees such as venue costs, arbitrator fees, among others. In this regard, the parties evade paying fees to an arbitration institution which normally turn out to be prohibitively expensive (Aliaj, 2016). Therefore, the opportunity of discussing fees directly with arbitrators allows parties using the ad hoc process to negotiate for reductions thus managing costs.
Allows evasion of institutional control
One of the key features of ad hoc arbitration is that parties have the autonomy to choose the number of arbitrators, the rules and policies they would prefer used, alongside other aspects. Aliaj (2016) explained that “… the flexibility permitted to parties to define issues in a manner that enables quick resolution” (p. 244). Therefore, through flexibility, parties have the opportunity to deviate from the confines of preexisting rules and policies. The rationale is that already established rules might inhibit realization of some of the interests that both parties have. Thus, the potential outcome is a lengthy and consequently costly arbitral process.
In summary, the very nature of ad hoc arbitration allows parties to enjoy certain privileges such as flexibility, evasion of institutional control and management of fees. These merits are focused on ensuring a cost-effective as well as a quick dispute resolution exercise. The ability to hold direct discussions with chosen arbitrators allows parties to negotiate fees which they are comfortable paying. Nigmatullina (2016) explained that the arbitration process is focused on finding a solution to an existing dispute, it is important to make such an exercise cost-effective and efficient. Ad hoc arbitration provides parties with conditions that can allow realization of both efficiency and cost-effectiveness.
Institution Arbitration
Having discussed the merits of ad hoc arbitration, a closer look at the advantages of institutional arbitration is also required. under this form of arbitration, the parties involved choose to designate an arbitral institution to administer and preside over the proceedings. However, unlike in ad hoc arbitration whereby parties are free to make their own rules, under institution arbitration, there are already preexisting rules (Nigmatullina, 2016). Thus, conflicting parties are required to accept established rules which are used to govern the process of dispute resolution. The idea is that whatever resolution is arrived at bases on an application of preexisting rules. Understandably, this means that the resolution might not be in full favor of the interests of both or either party in conflict (Aliaj, 2016). Nevertheless, some of the merits of institutional arbitration are:
Existence of procedural rules
The existence of procedural rules saves parties the time spent when negotiating what rules of engagement should apply. It is important to note that when parties seek arbitration, a dispute is already in place. Therefore, instead of going through the process of establishing rules that should be applied in the arbitral process, the institution entrusted to administer the proceedings provides rules that the parties can rely upon. Thus, such a system allows a direct focus on the problem hence allowing parties to manage their resources, both time and money, appropriately. Harnett and Schafler (n.d.) explained that such a process “… may result in a potentially less adversarial and speedier approach”.
Draft arbitration clauses are updated
Sagartz (1998) explained that the continued growth of transnational business leads to increased cases of international commercial disputes. Therefore, as the nature of disputes keep changing over time, one expects that arbitration clauses used to manage these issues also transition and are updated. When using an institution in the arbitration process, parties enjoy the safety already updated draft arbitration clauses. These clauses are based on most recent developments as pertains to arbitration law and procedures. Accordingly, conflicting parties are protected against issues that might arise from interpretive disputes. Hence, existing clauses set the limits for the dispute resolution process ensuring that an impartial solution is achieved.
Institutions appoint of arbitrators
During international commercial disputes, parties might want to be in a forum where they feel that arbitrators are not biased and that the entire process is fair. In a situation where the parties have the autonomy to appoint arbitrators, this might promote bias hence undermining the quality of the proceedings (French, 2013). However, institutional arbitration helps avoid such a situation. In such a case, the institution sought to manage over the arbitration process has the authority to decide the criteria to select arbitrators, how many of them they should be, alongside other factors. Therefore, allowing the arbitrating institution to manage the appointment of arbitrators enhances the credibility and dependability of the dispute resolution process.
A review of the merits of institutional arbitration shows that such kind of a technique helps promotes both credibility and reliability of the dispute resolution process. The parties are saved from having to establish rules that will be used to administer the arbitral process. Instead, the application of already existing and updated draft arbitration clauses ensures that there is fairness and equality.
Ad Hoc Arbitration or Institutional Arbitration?
Already gathered information reveals the merits of both ad hoc and institutional arbitration techniques. However, the main question is which method is most compelling and judicious in the international commercial setting. French (2013) acknowledged that in global markets, legal service providers get involved in structuring and negotiating transactions which operate a cross a number of jurisdictions. A considerable number of these transactions use dispute resolution techniques that are administered through application of internationally accepted rules. Another possibility is that they might refer to uniform and models derived from international and multilateral law-making bodies (French, 2013). Thus, it becomes a critical process for companies when choosing an arbitration method that is not only judicious, but also satisfies various expectations such as being efficient and cost-effective. Earlier, various advantages of ad hoc and intuitional arbitration techniques were identified. However, one ought to notice that the advantages of one arbitration technique could be perceived as the disadvantages of the other. in such a case, a critical evaluation of the efficiency of either arbitration technique is required. Thus, the discussion will be based on one factor, the place of judicial power within which the aspects of cost and efficiency are embedded.
A particular factor to consider when choosing an arbitration process is the place of judicial power. French (2013) described lawyers dealing with international commercial disputes as scouts in a jungle and maze of information who are forced to compare different laws that might be applicable and to choose those that best suit the nature of a particular case. Further, Sagartz (1998) acknowledged that before beginning the dispute resolution process, parties must choose where to litigate. He explained that “Forum shopping arises because the non-native party will understandably resist litigation on the other side’s turf” (p. 678). Both French (2013) and Sagartz (1998) are merely addressing the reality that companies face when seeking to settle disputes in the international setting.
In the context of ad hoc arbitration, the flexibility that parties enjoy could lead to delays. Expanding Sagartz’s (1998) point, the delays could result from, for instance, lack of consensus on the place of arbitration, the number of arbitrators, the rules to govern the process, alongside other aspects. A major concern is that due to delays, the case might be referred to a state tribunal. Hence, this leads to application of the principle of lex arbitri . Also known as the arbitral seat, lex arbitri “… is the jurisdiction which constitutes the judicial home of an international arbitration, and in that way anchors the international arbitration within a national system” (“Lex arbitri” , 2018, p. 1). Thus, the national law of a country where the international commercial dispute occurred is given the mandate or presiding over the dispute resolution process.
There are various effects of the arbitral seat some of which are that it provides where the arbitral process will take place, and that the choice made might lead to a non-enforceable solution (“ Lex arbitri” , 2018). Notably, anon-enforceable award might occur when the reciprocity requirements between or among states are not satisfied following the decision made through the arbitral seat. In practicality, a company might not feel that a decision made in a different jurisdiction, as is consistent with the arbitral seat, is fair based on the national law of its country of origin. Therefore, one can notice that under ad hoc arbitration, such kind of dilemma might undermine the entire arbitration process. It is also fundamental to note that “When deciding on an arbitral seat, the parties will usually consider a neutral forum, as well as the logistics of convenience and cost” (“Lex arbitri” , 2018, p. 8).
As discussed earlier, party autonomy is right that parties entering into an arbitration process are conferred. However, for ad hoc arbitration, such kind of flexibility and freedom to dictate the nature of proceedings poses numerous challenges. The discussion demonstrates that under institutional arbitration parties are exposed to already existing draft arbitration clauses which are regularly updated pursuant to arbitration laws and procedures. Therefore, one can notice that institutional arbitration somewhat escapes the challenges that the arbitral seat causes when it comes to ensuring the arbitration process is not only judicious but less costly and efficient.
One major factor demonstrating the benefit of using institutional arbitration is that there are emergency relief procedures in case parties do not reach a conclusion soon enough. Laffey, Rivero and Boyer (2016) noted that parties may find themselves in situations where already existing standard procedures do not allow for timely protection of their rights. Thus, this explains the need for emergency or injunctive relief procedures, which are only applicable when parties choose institutional arbitration. In Canada, an organization called the ADR Institute of Canada (ADRIC) outlines certain measures which can be taken in the event that parties do not reach an agreement even after institutional arbitration. Under ADRIC, Rule 3.7 address the need for an interim arbitrator. Rule 3.7.10 reads
“ The Interim Arbitrator has full discretion to grant the interim relief4 he or she considers appropriate and may consider (without limitation): (a) the need for the Urgent Interim Measures; (b) the urgency of the matter; and (c) the parties’ situations if the Urgent Interim Measures are or are not granted”.
Such a rule allows parties time to have their rights reviewed by the interim arbitrator, hence demonstrating the importance of impartiality in the arbitration process. In this regard, institutional arbitration appears to be a more effective and judicious arbitration process compared to the ad hoc approach.
Conclusion
Arbitration in international commercial disputes faces a number of challenges such as the choice of forum that the proceedings should take place. A discussion of the merits of ad hoc arbitration demonstrates that parties enjoy flexibility, an opportunity to negotiate fees with arbitrators as well as avoiding the influence of institutional control. However, under ad hoc arbitration, delays can occur thereby pushing towards the application of the principle of lex arbitri . Consequently, when this principle is applied, proposed solutions suffer the risk of being non-enforceable due to lack of satisfaction of reciprocity requirements between states where companies in conflict originate from. While institutional arbitration might be costly, it allows parties to ensure protection of their rights such as through emergency and injunctive relief procedures. The implication is that institutional arbitrators cannot carry on with proceedings unless parties are satisfied that the set conditions allow for a fair dispute resolution process. Hence, of the two arbitration techniques, institutional arbitration is both compelling, in terms of cost and efficiency, and judicious as pertains to impartiality.
References
ADRIC Arbitration Rules. (2014). Retrieved from http://adric.ca/wp-content/uploads/2015/11/ADRIC_Arbitration_Rules_Booklet.pdf
Aliaj, E. (2016). Dispute resolution through ad hoc and institutional arbitration. Academic Journal of Business Administration, Law and Social Sciences, 2 (2), 241-250.
French, R. (2013). International commercial dispute resolution and the place of judicial power. International Commercial Law and Arbitration Conference . Retrieved from http://www.hcourt.gov.au/assets/publications/speeches/current-justices/frenchcj/frenchcj22aug13.pdf
Hartnett, W. & Schafler, M. (n.d.). Ad hoc v. Institutional arbitration: Advantages and disadvantages. Retrieved from http://adric.ca/wp-content/uploads/2017/09/Hartnett-and-Shafler.pdf
Laffey, C. D., Rivero, F. & Boyer, N. (2016, December 16). Emergency relief in arbitration. Retrieved from https://www.reedsmith.com/en/perspectives/2016/12/emergency-relief-in-arbitration
Lex arbitri: The implications of the arbitral seat . (2018). Retrieved from https://www.duo.uio.no/bitstream/handle/10852/62554/702.pdf?sequence=1&isAllowed=y
Nigmatullina, D. (2016). The combined use of mediation and arbitration in commercial dispute resolution: Results from an international study. Journal of International Arbitration, 33 , 37-82.
Sagartz, A. (1998). Resolution of international commercial disputes: Surmounting barriers of culture without going to court. Ohio State Journal of Dispute Resolution, 13 (2), 675-709.
Schroeter, U. (2017). Ad hoc or institutional arbitration: A clear-cut distinction? A closer look at borderline cases. Contemporary Asia Arbitrary Journal, 10 (2), 141-199.
