Practical considerations for choosing between ad hoc and administered arbitrations

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Although there may now be a general awareness of arbitration as a form of alternative dispute resolution, it has been frequently observed in practice that many parties and non-arbitration lawyers do not fully appreciate the differences between an ad hoc arbitration and an administered (or institutional) arbitration. The importance of choosing the type of arbitration cannot be overstated, as it has considerable ramifications for various aspects of the arbitral procedure.

HKIAC_picAs its name suggests, an administered arbitration is an arbitration administered by an arbitral institution. This means that, prior to the constitution of an arbitral tribunal, the institution will guide the parties in moving the arbitration forward. This is typically done by way of issuing letters to stipulate the next step to take under the applicable rules, such as setting a deadline for the respondent to file its Answer to the Notice of Arbitration, or appointing an arbitrator on behalf of a party, or the parties, if there is a failure to do so. An administered arbitration, therefore, may be desirable for parties who are not familiar with the process of arbitration and wish to submit their arbitration to an institution to be carried out in an expeditious manner.

To ensure an institution’s jurisdiction over the case, a clause should clearly indicate that a particular institution is to administer the arbitration pursuant to its rules. For example, the HKIAC model clause, which states “arbitration administered by the Hong Kong International Arbitration Centre (HKIAC) under the HKIAC Administered Arbitration Rules in force when the Notice of Arbitration is submitted”, shows an intent that the HKIAC will act as the administering body.

By contrast, an ad hoc arbitration is an arbitration that is not administered by an institution. A clause providing for ad hoc arbitration will simply refer the parties’ dispute to arbitration, preferably with a designated seat of arbitration. In such arbitrations, the parties must directly liaise with one another (before the tribunal is constituted) in order to move the case forward. For those unfamiliar with arbitration, conducting an ad hoc arbitration may be a daunting task given the amount of procedural matters one must attend to before constituting the tribunal. In considering the choices of ad hoc and administered arbitrations, parties should at least bear in mind the following points.

COST CONSIDERATIONS

The main argument for choosing ad hoc arbitration over administered arbitration rests primarily on an institution’s administrative fees associated with the latter option. However, it is submitted that the various advantages of using administered arbitration typically outweigh the administrative costs incurred by referring a dispute to an institution.

First, fees are better regulated in an administered arbitration than an ad hoc one. In an arbitration under the 2013 HKIAC Administered Arbitration Rules, for instance, parties have the option to remunerate the tribunal either on an hourly rate basis or based on the amount in dispute. The HKIAC rules also place a cap on the tribunal’s fees (i.e., a maximum hourly rate, or a maximum lump sum payable). This gives parties a great degree of flexibility and predictability on the fees to be paid to the tribunal, allowing them to strategize accordingly.

By contrast, tribunals in an ad hoc arbitration are generally paid under a fee arrangement agreed between the parties and the tribunal, with no cap on the tribunal’s fees. As such, parties may spend a considerable amount of time negotiating with the tribunal over its fees. Parties may also feel reluctant to push back on the tribunal’s proposed terms of appointment, even if they consider that its fees are excessive. With standard terms of appointment from institutions such as those under the HKIAC rules, as well as the institution’s involvement, parties may rest assured that the tribunal’s fees can be well regulated.

EFFICIENCY CONSIDERATIONS

It has been noted in a 2015 report of International Chamber of Commerce (ICC) that party costs, including lawyer’s fees, make up 83% of the overall costs of the proceedings. As such, the more expeditious an arbitration proceeding is, the less costs a party will generally incur.

In this regard, administered arbitrations offer several mechanisms that are typically not found in ad hoc arbitrations, which can maximize the efficiency of the arbitration. The HKIAC rules, for instance, contain detailed provisions on handling complex arbitrations from joinder of parties to consolidation of proceedings. They allow parties claiming against different entities and/or under different causes of action to hear their disputes in a single arbitration, streamlining the cost and efficiency of the proceedings. The HKIAC rules also allow parties to conduct their arbitration under an expedited procedure, where the tribunal is obligated to render an award within six months of receiving the case file.

As an administered arbitration already provides parties with detailed provisions on how an arbitration is to be conducted, time can also be saved from making submissions on how the proceedings should be conducted in an ad hoc arbitration. This, in turn, plays a major role in lowering the costs of the arbitration. For instance, some ad hoc arbitration clauses may simply refer the parties’ dispute to arbitration without specifying the seat of the arbitration or the applicable rules. Failing agreement, parties will need to make rounds of submissions before a determination can be made by the tribunal. By contrast, as institutional rules generally provide for a default seat of arbitration – such as Hong Kong in the case of the HKIAC rules – valuable time can be spent on the merits of the case instead.

There are understandable circumstances where ad hoc arbitration is chosen as the preferred method of arbitration. The construction and shipping industries, for example, have traditionally opted for ad hoc arbitrations rather than administered arbitrations. This trend, however, could change in the near future. In a recent report published by PricewaterhouseCoopers and Queen Mary University of London, corporations have shown a preference towards administered arbitration as opposed to ad hoc arbitration, given that 86% of awards were rendered through institutional arbitrations rather than ad hoc arbitrations. In light of its innovations and evolutions, referring disputes to an administered arbitration is becoming an attractive option, given the numerous aids offered by institutions, as well as their time-tested rules.

James Ng is a counsel to the Hong Kong International Arbitration Centre