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International arbitration remains the preferred dispute resolution mechanism for cross-border disputes for major international corporations. In industries such as shipping, energy, oil and gas and insurance, international arbitration is the most commonly used dispute resolution mechanism.
The immediate benefits to international arbitration have been cited as enforceability of arbitral awards, the flexibility of the procedure and the depth of expertise of arbitrators as the major advantages.
From research undertaken on this matter, the organisations who prefer ad hoc arbitrations are corporations with a gross annual turnover of more than $50 billion. Such organisations are likely to have large, sophisticated in-house legal departments with experience of managing arbitration proceedings.
This article will consider ad hoc versus institutional arbitration provisions, and describe the new institutional arbitration option now available in Bahrain.
Quite simply ad hoc arbitration is where parties agree upon a form of arbitration that is specific to a particular contract or dispute, without referring to any arbitral institution. The parties may choose (in contract negotiations or following the crystallisation of a dispute) to devise and agree a bespoke arbitral process or alternatively to incorporate existing rules of procedure. In practice, existing rules are often incorporated as the negotiation of bespoke provisions has time and money implications in addition to the potential danger that a tailor-made process may prove to be unworkable in practice.
The main features of ad hoc arbitration are:
(a) Independent proceedings giving parties maximum flexibility;
(b) The Tribunal is chosen by the parties (although if agreement cannot be reached the matter may be referred to an appointing authority); and
(c) There is no review of the award by an arbitral institution.
Institutional arbitration, as the name suggests, refers to arbitrations conducted in accordance with the rules and procedures of an arbitration institution. Examples of arbitral institutions include:
(a) The ICC based in Paris;
(b) The London Court of International Arbitration, as the name implies is based in London however, the choice of seat, or legal place, is entirely up to the parties;
(c) The Dubai International Arbitration Centre (DIAC) created in 1994; and
(d) The Bahrain Chamber for Dispute Resolution (BCDR) created on 10 January 2010.
Each institution has its own characteristics and parties should consider the relevant rules and fee structures in addition to investigating the level of administrative support before deciding on a particular institution.
In December 2008 the American Arbitration Association (AAA) signed a memorandum of understanding with the Bahrain Ministry of Justice (BMoJ) in view of their joint development of the BCDR-AAA.
There is some confusion even within Bahrain as to the precise purview of the BCDR-AAA to adjudicate on disputes given its dual role as, firstly, a court of first instance of the Kingdom of Bahrain when certain specific criteria are met (referred to locally as "Section 1" cases) and, secondly, as a typical institutional arbitration centre demonstrating many similar characteristics to the other institutions listed above ("Section 2" cases).
This confusion is potentially exacerbated by the fact that the Procedural Rules of the BCDR relating to Section 1 cases use very similar technology to the BCDR-AAA Rules governing arbitrations which apply in relation to Section 2 cases.
Under Royal Decree No. (30) of 2009, when hearing Section 1 cases, the BCDR has jurisdiction, in respect of claims exceeding BHD 500,000 (about USD 1,326,612) if in addition the dispute falls into one or more of the following categories:
(a) International disputes (one of the parties, or the place where a substantial part of the obligation to be performed is outside Bahrain, or the location most closely connected with the dispute is outside Bahrain).
(b) Commercial disputes (where subject matter concerns relationships of a commercial nature, whether contractual or non-contractual).
(c) Disputes amongst financial institutions licensed by the Central Bank of Bahrain (CBB) or disputes between a CBB licensee other institution, company or individual.
Section 1 cases are heard in Arabic and (although they are heard in the same venue), unlike Section 2 cases there is no selection of the tribunal members who are drawn from the local judiciary. In addition, Section 1 cases have their own fee scale in line with the local courts that is higher than those fees applying to Section 2 cases.
Section 2 cases follow a similar procedural pattern to normal institutional arbitrations and (in the absence of agreement of alternative arbitration rules) the stipulations of the BCDR-AAA Arbitration Rules (and the associated fees) apply.
It should also be noted that the BCDR provides separate rules relating to mediation services, although an examination of such falls without the scope of this note.
The purpose of this paper is not to determine what is the better option, ad hoc or institutional arbitration, as this will be dependent upon the parties themselves, the nature of the contractual relationship and the dispute itself.
The two different processes are considered to have specific advantages and disadvantages as follows:
(a) Flexibility - A particular advantage of ad hoc arbitration is that it can be tailored to the specific needs of the parties and the nature of the dispute. However, the drafting of bespoke provisions may involve lengthy negotiations and therefore may be more expensive and time consuming. Great care is needed to ensure that any arbitral process is both enforceable and workable.
(b) Procedural control/certainty - Institutional arbitration gives the parties the benefit of using a tried and tested process and a proven set of terms and conditions to rely upon. This means that the fundamental steps of the process, including costs, are managed and controlled by the institution.
In contrast, ad hoc arbitration depends, to a certain extent, on the co-operation of the parties which may be difficult to achieve if the relationship has broken down. Generally ad hoc arbitrations are more vulnerable to procedural challenges and obstructive tactics. Parties may seek redress from the applicable procedural law but this will be both time consuming and expensive.
(c) Knowledge of arbitrators - it is correct that arbitral institutions do have access to a large pool of experienced arbitrators. However, in practice the parties and their legal advisers, with particular knowledge of the relevant industry, are just as able to make a suitable appointment.
(d) Administration - Some arbitration institutions have the benefit of a professional administration service which, in theory, ensures the smooth running of the proceedings, however with ad hoc arbitrations the appointment of an administration secretary may achieve the same result.
(e) Costs - The choice of ad hoc or institutional arbitration is unlikely to have a fundamental impact on the costs of the proceedings as this largely depends on the method and rate adopted by the institution or tribunal. However, it may be argued that institutional arbitration offers more clarity on the issue of costs as the institutions have in place a framework of charges for administration services and arbitrators. A further advantage of institutional arbitration is that the major institutions can hold funds on behalf of the parties if appropriate.
(f) Speed - In practice, there is unlikely to be little difference between the processes.
(g) Confidentiality - One of the main advantages of arbitration is that awards are confidential to the parties and are not made available to the general public - therefore there is no significant difference between the processes.
(h) Enforcement - There is a perception that there is an advantage in the award emanating from an internationally respected institution. There is no statistical evidence to support this view.
In practice, the choice of ad hoc arbitration or institutional arbitration depends on the parties, the contractual circumstances and the nature of the dispute. The research shows that the majority of corporations prefer institutional arbitration and that the use of institutions is on the increase. Similarly, there is a growing confidence and need for regional institutions reflected in the launch of bodies such as the Bahrain Chamber for Dispute Resolution.
We have extensive experience of managing commercial disputes relating to real estate and construction matters in Bahrain as well as the wider region. Currently, we are handling the largest number of disputes at the BCDR than any other international law firm.
This article was written by Simon Green and David Savage.
For more information, please contact Simon on +974 40 316610 or firstname.lastname@example.org.