Institutional Arbitration vs Ad-Hoc Arbitration: Making a choice

Tokyo Corporation is a building construction company that is about to enter a contract with Nairobi Holdings which is to supply her with raw materials for the construction of a building for Mr Berlin. Both organizations are startups.

The negotiations have progressed to the dispute resolution section, and arbitration is the popular vote. In deciding on the arbitration clause, management leaders from both sides are undecided on whether to include in the clause, an arbitral institution to administer the dispute resolution process or to just indicate that arbitration will be the method for dispute resolution and leave the dynamics till when a dispute arises.

Mr Helsinki, CEO of Nairobi Holdings sent a mail to his legal adviser and friend, Rio, to ask him of the meaning and implications of the options before them. In breaking down the issue to his friend, Rio sent this mail.

Subject: Understanding Institutional Arbitration and Ad-Hoc Arbitration

Dear Friend, there are two major types of arbitration based on the arbitration clause included in a contract.

There is institutional arbitration where parties to an arbitration clause agree that arbitration is to be administered by an arbitral institution.  Under this form of arbitration, the processes are governed by the institutional rules. Examples of arbitral institutions include the London Court of International Arbitration (LCIA), and the Lagos Court of Arbitration (LCA). Under institutional arbitration, the arbitral institution has some of the following roles to play:

  • Receiving the request for arbitration.
  • Setting and managing the financial aspects of the arbitration {Tribunal Fees, deposits, etc).
  • Appointment of arbitrators where it is the consent of the parties.

Some of the peculiar benefits of Institutional Arbitration include: Predictability of what to expect in the process, freedom from the burden of monitoring payment obligations for the arbitrators and the parties, amongst others.

On the other hand, there is the Ad-Hoc Arbitration where the process is not administered by an institution. Here, the parties determine the entire process, from the appointment of arbitrators and the applicable rules to the matters that deal with administration and finances. The benefit that is attached to this is immediately clear, and it is the freedom for the parties to completely decide how the process will go.  Another benefit is that parties will not need to pay for fees attached to utilizing an administering institution.

Which form is better?

Intrinsically, one form is not better than the other, the circumstances surrounding the clause and the desire of the parties determine their choice. However, if predictability and structure are what you are after, then Institutional arbitration will be better, but if flexibility is important to you, then Ad-hoc arbitration will be best serve your need.

Which type of arbitration would you advise Mr Helsinki to insist on at the negotiations?

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