Ad Hoc Arbitration or Institutional Arbitration? Advantages and Disadvantages

I. Introduction

In ad hoc arbitration, there is no institutional arbitration center that manages the arbitration process. The arbitration process is conducted by the parties and the arbitrator(s) and, in some cases, an arbitrator's secretary appointed by the arbitrator. The rules under which the arbitration proceedings will be conducted are generally the procedural rules in the arbitration laws in force under the law of the country agreed as the place of arbitration. For this reason, a clear determination of the place of arbitration in ad hoc arbitration is of great importance. For example, even if only the phrase "arbitration, Paris" is included in the provisions related to "Dispute Resolution" in the contract, it is considered that there is a valid arbitration clause.

It is possible to conclude a valid arbitration agreement with a provision such as "Disputes arising from or related to this contract will be resolved through arbitration, Arbitration place, Zurich". It would also be appropriate for the parties to determine the language of the arbitration and the law to be applied to the contract.

In ad hoc arbitration, the arbitration law in force at the place of arbitration (such as the arbitration section of the Turkish Code of Civil Procedure or Turkish International Arbitration Law) is taken as the law in which the arbitration is conducted subject to its authority. However, the parties may also choose certain sets of rules to be applied to the arbitration procedure. In other words, it is also possible for arbitration proceedings to be conducted according to sets of rules chosen by the parties, such as the UNCITRAL Arbitration Rules. In this case, while the national laws continue to be applied in the background, the rule sets chosen by the parties in the foreground are applied by the arbitrators. If an action for annulment is to be filed following the rendering of the arbitral award, it will be filed in the courts of the place of arbitration in accordance with the national arbitration laws in force at the place of arbitration.

In institutional arbitration, the proceedings are carried out with an institutional arbitration center agreed by the parties. Centers such as ISTAC, ITOTAM, and TOBB in Turkey; in the international arena centers such as; ICC (International Chamber of Commerce) Court of International Arbitration, LCIA (London Court of International Arbitration), SAC (Swiss Arbitration Center), SIAC (Singapore International Arbitration Center) are at the forefront.

If institutional arbitration is to be preferred by the parties, including the model arbitration clause of the relevant arbitration institution in the agreement between the parties ensures that the arbitration agreement is valid. For example, if ISTAC arbitration is to be preferred, the ISTAC Model Arbitration Clause should be included in the contract. In addition, as in ad hoc arbitration, the place of arbitration and the language of arbitration should be specified.

In institutional arbitration, the arbitration procedure is conducted under the arbitration rules of the agreed arbitration institution. Institutional arbitration centers are not the institutions or courts that directly resolve the dispute themselves. These centers only perform some functions for the smooth and systematic resolution of the dispute by the arbitrators. For example, the selection of the arbitrator is made by the institution when a party cannot choose its arbitrator. Thus, possible disruptions and delays are prevented.

In institutional arbitration, disputes are resolved by arbitral committees organized specifically for each dispute. Appointment of a sole arbitrator is possible, as well as the appointment of more than one arbitrator. The will of the parties plays an important role in the selection of arbitrators. For example, if the arbitral tribunal will consist of three arbitrators, the arbitration rules of institutional arbitration centers generally stipulate that an arbitrator be chosen by each party and a presiding arbitrator is appointed by these arbitrators.

As in ad hoc arbitration, the place of arbitration has great importance in institutional arbitration. This is because the national arbitration regulations in force at the place of arbitration preserve their nature of being the regulations in which the arbitration takes place subject to the authority of the arbitration. Therefore, an action for annulment against an arbitral award rendered at the end of institutional arbitration is again should be filed in the courts of the place of arbitration.

In this brief note, these two arbitration types will be compared and briefly evaluated which one is more advantageous or disadvantageous in what respects.

II. COMPARISION OF AD HOC ARBITRATION AND INSTITUTIONAL ARBITRATION

II.I. Evaluation in terms of Institutional Arbitration 

Advantages Of Institutional Arbitration: 

• The institution has a pre-established, up-to-date set of rules and manages the arbitration process. In other words, the institution supervises the entire process and assures the parties that the proceedings will take place at certain standards.

• The institution provides trained personnel to the parties to manage the arbitration process. Administrative staff will ensure that the deadlines are respected and that the process runs as smoothly as possible.

• They have a wide range of arbitrators. There are arbitrators specialized in different fields to resolve all kinds of disputes. This allows the parties to select an arbitrator with the necessary skills and expertise to ensure a fast and effective dispute resolution process.

• It has a good mechanism to deal with the uncooperative party in the arbitration process. Many arbitrators make it clear that the proceedings will continue, and if any party fails to attend without a valid excuse, even after being duly summoned by the institution, the proceedings will proceed.

• The parties are relieved of the trouble of preparing an arbitration clause. After the parties choose an institution, they can include that institution's draft clause in their contracts.

• Facility and support services are provided by the institution so that the proceedings can be carried out.

• A decision made by a prestigious institution is easier in terms of recognition and enforcement.

Disadvantages of Institutional Arbitration:

• High administrative fees may be charged for service and facility use.

• Due to the bureaucracy of the institution, the parties may lose their freedom of will over the arbitration.

• The process has an inflexible structure as it prevents the parties' freedom of will over the arbitration proceedings. 

• Less protected than ad hoc arbitration in terms of privacy

II.II. Evaluation in Terms of Ad Hoc Arbitration

Advantages Of Ad Hoc Arbitration:

• Suitable for all kinds of claims, big or small. It can be designed according to the needs of the parties, especially when the interests of the parties are great, or a government agency is involved.

• Parties can set their own rules in arbitration, create their timelines, and allow arbitration to proceed at their own desired pace. 

• The process is flexible in that the parties decide to cooperate and the dispute resolution process. However, the fact that the parties have different nationalities and legal systems may prevent the parties from agreeing on the procedure at this point and may cause delays.

• It is less expensive than institutional arbitration because parties only need to pay court fees for arbitrators, attorneys, or representatives. The costs of conducting the proceedings are also usually less than the fees payable to any arbitration institution. The parties are free to decide where the hearing will take place.

• Arbitrator fees are not negotiated in institutional arbitration, the fees are determined by the institution, but this negotiation is possible in Ad Hoc arbitration.

• If the parties of the arbitration are governments and the subject of dispute is public interest, a large amount of public money, etc. Ad Hoc arbitration is preferred, and the issues are handled quickly and confidentially.

• Confidentiality is much better protected in ad hoc arbitration than institutional arbitration.

Disadvantages of Ad Hoc Arbitration:

• When choosing an arbitrator, the parties should rely on their prudence regarding the identity, quality, expertise, and know-how of the arbitrator. Wrong arbitrator selection can affect the arbitration.

• The parties must agree on timelines and terms from the beginning of the arbitration.

• In case of procedural failure, since there is no oversight of an arbitration institution, it is possible to seek assistance from state courts that are in charge and authorized within the scope of the arbitration regulations included in the arbitration law. This can lead to delays and unpredictable results in arbitration proceedings. For example, in cases where the respondent does not appoint an arbitrator, the claimant has to apply to the state court and request the appointment of an arbitrator. 

• In disputes that are complex and involve a lot of paperwork, the arbitral tribunal may hire a secretary. Parties are responsible for such extra costs.

• Continuing the proceedings in the absence of a party may be risky because the absent party may appeal the decision, arguing that the arbitral tribunal did not provide a fair hearing.