CHOOSING THE RIGHT PATH : INSTITUTIONAL VS. AD HOC ARBITRATION

INTRODUCTION

In recent decades, the field of dispute resolution has seen tremendous change, with arbitration being the most popular method of settling disputes, especially in business and international settings. Arbitration offers parties a more expedient, private, and effective way to settle disagreements than traditional litigation, with clear benefits including speed, lower costs, and procedural flexibility. Arbitration has emerged as the go-to venue for settling complicated disputes as international commerce and cross-border transactions continue to grow, particularly in industries where timeliness and confidentiality are critical.

The process through which a disagreement or conflict between two or more parties regarding their respective legal rights and obligations is brought to light and decided judicially and legally by the application of the law by one or more individuals (the arbitral tribunal) rather than by a court of law is known as arbitration. Arbitration is merely a substitute for litigation; it works in tandem with the legal system rather than taking its place in every way.

The parties to a disagreement will submit it to one or more individuals, referred to as "arbitrators" or "arbitral tribunals," whose ruling or award they consent to be bound by in an arbitration case. Arbitration is frequently used to settle business conflicts, especially in the commercial transaction.

The purpose of this piece of writing is to critically analyse how arbitration has changed throughout time in relation to the larger field of alternative dispute resolution (ADR). It will examine the differences between institutional and ad hoc arbitration, weighing the benefits and drawbacks of each approach.

Due to its numerous advantages over traditional legal proceedings, arbitration continues to rise in importance in today's globalised society. It provides an effective and impartial platform for settling cross-border conflicts, particularly those involving international trade. The notion of party autonomy gives parties the opportunity to choose the governing legislation, arbitrators, and procedural rules that best suit their interests. Arbitration is the best option for companies looking to avoid drawn-out public trials since it is quicker, less expensive, and provides secrecy. Furthermore, knowledgeable rulings are guaranteed by qualified arbitrators with experience in pertinent domains.

Thus this research endeavours to navigate this intricate terrain,aiming to elucidate the enforceability of institutional arbitration rules within the Indian legal ecosystem. By examining the legal landscape and practical application of arbitration in real world scenarios,this study seeks to provide clarity and insight into the evolving dynamics between ad hoc and institutional arbitration.

Through a meticulous analysis of the existing literature,case studies,legal precedents and comparative studies from jurisdictions of regulatory framework for institutional and ad hoc arbitration ,this research aims to contribute to the ongoing discourse on legal paradigms.

Historical background

In ancient India, where local disputes were frequently resolved by the village headman, whose position was either elected or inherited, arbitration was a long-standing practice. In certain communities, it was a council rather than a single individual, and it is still referred to as a Panchayat today. The Bengal Regulation of 1772 mandated that all conflicts be referred to arbitration, the result of which would be regarded as the court's judgement. The British took their dispute resolution techniques to Bengal when they established the East India Company there.

The evolution of arbitration law in India has been marked by significant legislative developments. To address inconsistencies in existing laws, the Indian Arbitration Act, 1899 was introduced, drawing inspiration from English law. This Act permitted parties to refer future disputes to arbitration without court involvement. However, its direct application was limited to Presidency Towns, despite its formal extension across India.

Later, the Code of Civil Procedure, 1908 replaced the previous legal framework and included arbitration provisions under Sections 89 and 104 of the Second Schedule. Since the Indian Arbitration Act, 1899 was more specific in nature, these provisions were kept under a separate schedule. Following the enactment of the English Arbitration Act, 1934, based on the recommendations of the MacKinnon Committee, the Indian government introduced the Arbitration Act, 1940.

Over time, the 1940 Act was widely criticized for its technical rigidity and procedural delays, which hindered the efficiency of arbitration. In the case of Guru Nanak Foundation v. Rattan & Sons, the court observed that arbitration, meant to be a swift and cost-effective dispute resolution mechanism, had become excessively complex and entangled in legal formalities. Due to growing concerns, the Law Commission of India, under the leadership of H.R. Khanna, examined the issue in its 76th Report and recommended legal reforms.

On December 4, 1993, a conference led by Prime Minister P.V. Narasimha Rao explored international arbitration models, including the UNCITRAL Model Law on International Commercial Arbitration, to modernize India’s arbitration system. This discussion ultimately led to the introduction of the Arbitration and Conciliation Act, 1996.

The Arbitration and Conciliation Act, 1996 serves as a comprehensive legal framework with 86 sections, designed to streamline and modernize arbitration laws, incorporate UNCITRAL principles, and provide a uniform, fair, and efficient dispute resolution system.

Types of arbitration process 

Institutional Arbitration

When a specialist organisation steps in and assumes responsibility for managing the arbitration procedure, it's known as an institutional arbitration. Every institution has a unique set of regulations that serve as a foundation for the arbitration as well as a unique administrative structure to support it.

Some common institutions are:

1. London Court of International Arbitration (LCIA)

2. the International Chamber of Commerce (ICC)

3.Singapore International Arbitration Centre (SIAC)

If we look at the institutional arbitrations in india these are;

1.    Indian Council of Arbitration(ICA)

2.     International Chamber of Commerce(ICC)

3.    Federation of Indian Chamber of Commerce & Industry(FICCI)

4.    World Intellectual Property Organisation(WIPO) 

5.    The International Centre for Alternative Dispute Resolution(ICADR)

6.     Mumbai Centre for International Arbitration (MCIA)

Through the India International Arbitration Centre Act of 2019, the India International Arbitration Centre (IIAC) was established because the Indian Parliament saw the necessity for India to have a flagship organisation to represent the country.

An arbitration clause that names a certain institution as the arbitration administrator is frequently included in contracts between two parties.

The parties are favouring this type of arbitration over ad hoc arbitrations more and more. Some Asian countries, such as India, have included clauses favouring institutional arbitrations in their domestic laws in an effort to establish themselves as strong centres for international arbitration.

Advantages of institutional arbitration

1.    Avoids the discomfort of the parties and the arbitrators discussing, agreeing and fixing their remuneration.which also helps the arbitrators to maintain a certain level of material detachment from the parties.

2.    Arbitration can continue, and an award may be issued, even if a party refuses or fails to participate in the proceedings.

3.    Pre-defined rules and procedures that guarantee the prompt commencement of arbitration proceedings.

4.    Institutional administrative support, including a secretariat or arbitration court.

5.    A selection of qualified arbitrators for parties to choose from.

6.    Support in persuading unwilling parties to engage in arbitration.

7.    A structured framework with a demonstrated track record of effectiveness.

Institutional arbitration saves parties and their legal representatives the time and effort required to establish an arbitration provision and decide on the arbitration procedure. After deciding on an institution, the parties might include a draft clause from that institution in their agreement. In certain situations, they might want to include additional items in the clause.

Experts from all over the world and a wide range of professions often make up an institution's panel of arbitrators. This enables parties to choose an arbitrator who has the knowledge, abilities, and experience needed to deliver a speedy and efficient dispute settlement procedure.

It is upto the institution to make an appointment and institution is free to refuse an appointment if it considers that the nominated arbitrator lacks the necessary competence or impartiality.

The fact that arbitration renders a final, legally binding decision that is unchallengeable is one of its widely cited benefits. Nonetheless, there is an inherent danger that a tribunal's error won't be able to be fixed later. Some institutional regulations allow for review of the draft award prior to the final award being made in order to mitigate this risk. The draft award might then be confirmed, modified, amended, or thrown aside by an arbitral tribunal of second instance upon appeal by a disgruntled party. Such an option is absent from less formal methods.

Disadvantages of institutional arbitration

1.    Bureaucracy within the organisation, which can result in delays and extra expenses;

2.    The parties may be expected to reply within irrational time frames.

3.    Administrative fees for services and facility use, which can be significant if there is a significant amount in dispute—sometimes more than the actual amount in dispute.

Ad hoc arbitration

In a country like India till a considerable time arbitrations have been synonymous with ad hoc arbitrations. In this type of arbitration ,the parties choose the arbitrator and the arbitral proceedings take place without there being anybody to regulate the proceedings.

 It refers to an arbitration where the procedure is either agreed upon by the parties or in the absence of an agreement, the procedure is laid down by the arbitral tribunal. Thus, it is an arbitration agreed to and arranged by the parties themselves without seeking the help of any arbitral institution.

In such type of arbitration process if the parties are not able to nominate the arbitrator by consent the appointment is done by high court in case of domestic arbitration and by supreme court in case of international arbitartion in India still till date most of the arbitrations are ad hoc arbitration

Ad hoc proceedings have the potential to be more flexible, faster and cheaper than institutional proceedings. The absence of administrative fees alone provides an excellent incentive to use the ad hoc procedure.

The arbitration agreement may simply specify that "disputes between parties will be arbitrated," regardless of whether it was negotiated before or after a dispute has emerged. Since this will have a major influence on a number of important problems, including the procedural rules governing the arbitration and the enforcement of the judgement, it is at the very least advisable to designate the location or "seat" of the arbitration. The "seat" or site of the arbitration will decide any outstanding issues and concerns regarding its execution, such as how the tribunal will be chosen or how the processes will be carried out, if the parties are unable to agree on the specifics. This approach will only work if the seat of the arbitration has an established arbitration law.

Ad hoc proceedings need to be kept entirely separate from institutional arbitration.appointment of a qualified arbitrator can lead to the parties agreeing to designate an institutional provider as the appointing authority.

Advantages of ad hoc proceedings:

1.    A well-organized ad hoc arbitration should be more cost-efficient, making it a better option for smaller claims and parties with limited financial resources.

2.    In ad hoc arbitration, the arbitrator has to take on more responsibility for managing and organizing the entire process. One major downside is that its success largely depends on whether the parties can agree on the rules and procedures—something that can be difficult when they’re already in conflict.

3.    The failure of one or both parties to fully cooperate can result in time spent resolving issues or an ultimate recourse to court.

4.    One of the primary advantages is its flexibility,enabling the parties to decide the dispute resolution procedure themselves.

5.    This arbitration process is less expensive than institutional arbitration  because 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.

6.    The arbitrators' fees will be negotiated directly between the parties and the arbitrators, allowing them the option to negotiate,

Disadvantages of ad hoc proceedings:

1.    Even Though this type of arbitration process requires greater degree of effort ,cooperation and expertise from the parties to determine arbitration rules.

2.    This method may demand significant time, effort, and costs without ensuring that the final terms will cover all possible scenarios. Additionally, if parties have not settled arbitration terms beforehand, they are unlikely to collaborate effectively once a dispute emerges.

3.    When institutional rules are incorporated into ad hoc proceedings, provisions requiring the provider’s administration, such as appointing arbitrators, must be modified or omitted. This may lead to ambiguities or inadvertently result in an institutional arbitration process.

4.    When selecting an arbitrator, parties should carefully consider their qualifications, experience, and expertise. Choosing the wrong arbitrator can negatively impact the arbitration process

Comparison between ad hoc and institutional approach;

1.    Efficiency is a key aspect of arbitration, as parties seek a swift and cost-effective resolution to their disputes. While ad hoc arbitration may reduce administrative expenses associated with institutional arbitration, institutions offer greater flexibility in managing the timeline of proceedings and oversee the entire arbitral process through established rules. In contrast, ad hoc arbitration may face challenges in handling complex disputes, prolonged legal proceedings, and enforcing awards due to the lack of institutional support. On the other hand, institutional arbitration benefits from structured procedures, access to institutional resources, and well-developed administrative mechanisms, leading to more efficient dispute resolution.

2.    Autonomy is another vital aspect of arbitration, allowing parties to tailor proceedings to their specific needs while ensuring confidentiality. In ad hoc arbitration, parties have the highest level of control over structuring the process, selecting arbitrators, and determining the applicable law. This flexibility is particularly beneficial in disputes involving sensitive cultural aspects or specialized subject matter. Conversely, institutional arbitration imposes certain procedural and administrative constraints on party autonomy. However, institutional oversight also offers administrative assistance, standardized procedures, and procedural certainty, enhancing predictability and minimizing procedural disputes.

3.    In ad hoc arbitration, parties select their own arbitrator, and the proceedings take place without any overseeing authority. This lack of regulation has made the process cumbersome, time-consuming, and costly, leading to significant criticism. To address these challenges, efforts have been made to streamline the arbitration framework, resulting in substantial reforms over the past decade.

India has taken significant steps to enhance its arbitration ecosystem by implementing legislative reforms, boosting investor confidence, and addressing increasingly complex disputes. As a result, institutional arbitration has gained considerable momentum in the country. Recognizing the need to keep pace with global standards, the Indian government has prioritized the development of an efficient and consistent dispute resolution mechanism. By embracing institutional arbitration, India aims to establish itself as an arbitration-friendly jurisdiction, attract foreign investment, and provide a reliable and effective means of resolving disputes.