Brief History of Arbitration in India

1. Introduction
In the modern era of dispute resolution, the term ‘arbitration’ needs no introduction. It has
become synonymous with dispute resolution for commercial contracts and has been successful in
dethroning litigation as the preferred mode of dispute resolution for commercial disputes. The
success of arbitration is based on the pillars of speed, party autonomy and flexibility of
proceedings which are the paramount considerations for 21st century dispute resolution.
The key contributor to the success of arbitration is the ever evolving jurisprudence, specifically
the development the law has witnessed since the turn of the millennium. In this article we look at
the brief history of arbitration and its development in the Indian legal system retracing its steps
from being ‘another dispute resolution mechanism’ to being the ‘preferred dispute resolution
mechanism’
II. What is Arbitration?
The term arbitration has not been defined in any statute. Thus, the meaning of arbitration has to
be ascertained from legal dictionaries, works of eminent jurists and judicial pronouncements
under different jurisprudence. One of the earliest definitions of the term ‘arbitration’ can be
found in the judgement of Collins V/s. Collins where Justice John Romilly defined arbitration
as “a reference to the decision of one or more persons, either with or without an umpire, of some
matter or matters in difference between the parties”. Halsbury’s Law of England defines
‘arbitration’ as “reference of a dispute or difference between not less than two parties for
determination, after hearing both sides in a judicial manner, by a person or persons other than a
court of competent jurisdiction”. Similarly in Black’s Law Dictionary, ‘arbitration’ is defined as
“An arrangement for taking and abiding by the judgment of selected persons in some disputed
matter, instead of carrying to established tribunals of justice, and is intended to avoid the
formalities, the delay, the expense and vexation of ordinary litigation”
To sum up, ‘arbitration’ is an alternate mode of dispute resolution, decided by a private
adjudicator where party autonomy is paramount and the decisions of such private adjudicators
are final.
III. Brief History of the Law in India
Arbitration is an ancient concept and its origin can be traced all the way back to Greek and
Roman City States. As early as sixth century B.C., Greek city states were resolving disputes like
ownership of properties, assessment of damages etc. through arbitration. Even the works of
eminent historians like Herodotus and Thucydides refer to arbitration. Under the Roman law, the
term ‘compropmissum’ or compromise was a well-known and oft chosen mode of dispute
resolution and is considered to be a precursor of arbitration.
India also has a long tradition of arbitration and the concept of non-judicial dispute resolution
was prevalent in the Indian society, prior to any codified law. The works of Yajnavalka refers to
certain special arbitration courts in ancient India. Even the panchayat system in India is
considered as one of the earliest forms of arbitration. While describing the concept of arbitration,
Chief Justice A. Marten observed as “It is indeed a striking feature of ordinary Indian life. And I
would go further and say that it prevails in all ranks of life to a much greater extent than is the
case in England. To refer matters to a panch is one of the natural ways of deciding many a
dispute in India. It may be that in some cases the panch more resembles a judicial Court because
the panch may intervene on the complaint of one party and not necessarily on the agreement of
both, e.g., in a caste matter. But there are many cases where the decision is given by agreement
between the parties”
Arbitration in ancient India is a vast subject and merits its own article. The present article shall
deal with the development of codified laws in India governing arbitration. The development of
arbitration regime in India can be broadly classified under 3 distinct phases:- (i) The Pre-1940
phase; (ii) The 1940-1996 Phase; and (iii) The Post 1996 phase.
a)The Pre 1940 phase – An era of scattered laws
The first enactment devoted solely to arbitration in India was the Indian Arbitration Act, 1899.
However, its application was limited only to the Presidency Towns of Calcutta, Bombay and
Madras. The other dedicated law for arbitration was the Second Schedule of Civil Procedure
Code, 1908. Reference of arbitration was also found in the Indian Contract Act, 1872 (Sections
10 and 28) and Specific Relief Act, 1877 (Section 21).
As evident from above, the law related to arbitration was scattered in multiple statutes and there
was no consolidated law governing arbitration. The lack of a consolidated law was a major
concern for the legislators and therefore several committees were set up to revise the existing law
and create a more robust framework for arbitration.
bI The 1940-1996 Phase – The Arbitration Act of 1940
In the year 1940, a consolidated law related to arbitration was enacted which repealed the
existing laws related to arbitration. The Arbitration Act, 1940 was based on the English
Arbitration Act, 1934 and was a complete code for domestic arbitrations. However, the Act did
not contain any provisions related to enforcement of foreign awards. Foreign awards were
enforced in India through two separate legislations viz. (i) the Arbitration (Protocol and
Convention) Act, 1937 (for Geneva Convention Awards) and (ii) the Foreign Awards
(Recognition and Enforcement) Act, 1961 (for New York Convention Awards).
The arbitral regime in India, under the 1940 Act and ancillary enactments, was far from
satisfactory and was severely criticized before different fora. It failed to achieve its desired
objective of providing a speedy and efficacious dispute resolution mechanism. The working
under the regime was slow, complex, expensive, hyper-technical and fraught with judicial
interference. The disastrous effect of the 1940 regime was aptly summed up by the Supreme
Court in the following judgements:
i) F.C.I. v. Joginderpal Mohinderpal
“We should make the law of arbitration simple, less technical and more responsible to the actual
realities of the situation, but must be responsive to the canons of justice and fair play and make
the arbitrator adhere to such process and norms which will create confidence, not only by doing
justice between the parties, but by creating a sense that justice appears to have been done.”
ii)Guru Nanak Foundation v Rattan Singh
“Interminable, time consuming, complex and expensive Court procedures impelled jurists to
search for an alternative Forum, less formal, more effective and speedy for resolution of
disputes, avoiding procedural claptrap and this led them to Arbitration Act, 1940 (“Act” for
short). However, the way in which the proceedings under the Act are conducted and without
exception challenged in Courts, has made Lawyers laugh and legal philosophers weep.
Experience shows and law reports bear ample testimony that the proceedings under that Act
have become highly technical accompanied by unending prolixity, at every stage providing a
legal trap to the unwary. Informal Forum chosen by the parties for expeditious disposal of their
disputes has by the decisions of the Court been clothed with 'legalese' of unforeseeable
complexity.”
c)The Post-1996 phase - The current regime
i) The Act of 1996
The 1940 regime was recognized as an antithesis to the growth that India was witnessing post the
economic liberalisation. Thus, a new statutory regime was the need of the hour, a statutory
regime which would complement such growth and attract foreign investors in the country.
In this backdrop, the watershed moment in the Indian arbitration law was the enactment of
Arbitration and Conciliation Act, 1996 (“the Act”). The Act was based on the UNCITRAL
Model Law on International Commercial Arbitration, 1985 and the UNCITRAL Conciliation
Rules, 1980. It was enacted with the following key purposes:
1. Creating a consolidated legal framework dealing with arbitrations (both domestic and
international) and conciliation
2. Minimising judicial interference and supervision
3. Creating a speedy and cost-effective dispute resolution mechanism
4. Providing a robust enforcement system for arbitration awards
However, over time the new law became afflicted with the same malaise it sought to cure. The
arbitration process suffered from long delays and was atrociously expensive. These problems
were compounded by ever-increasing judicial interference at all stages of arbitration, which led
to further delays and defeated the very object of the Act i.e. moving away from the rigmaroles of
traditional litigations.
ii) Amendment of 2015
The first attempt to amend the Act was made through the Arbitration and Conciliation
(Amendment) Bill 2003. However, several concerns were raised about the proposed amendments
which led to the Bill being withdrawn from Parliament.
Finally, under the chairmanship of Hon’ble Justice (Retd.) A.P. Shah, a new committee was
formed to look into the Act and suggest amendments. This Committee suggested various changes
to the existing Act and most of these changes were accepted by the legislature. This culminated
and led to the enactment of the Arbitration and Conciliation (Amendment Act), 2015. This
Amendment Act substantially changed the existing regime and ushered in a new era of
arbitration which greatly enhanced the public perception towards arbitration. The key changes
brought about by the 2015 amendment act can be broadly classified under the following
categories:
1. Restricting Judicial Intervention: Arbitration was conceptualised as a process with
minimal court intervention. However, owing to several judicial pronouncements, court
intervention became a norm. Thus, a key object of this Amendment Act inter alia was to
limit such judicial interference. Pursuant to such objectives, the Amendment Act inserted
express provisions which drastically curtailed the powers of the Court and its interference
in arbitral proceedings.
2. Expediting the process of arbitration: Another key object of the 2015 Amendment Act
was to eradicate the delays and turn arbitration into a speedier and an effective dispute
resolution mechanism. To achieve this objective, specific timeframes were introduced for
different stages of arbitral process. A time-frame of 12 months (extendable by further 6
months) was also prescribed for completion of the entire arbitration proceeding, failing
which parties had to approach court for extension. The courts were also given liberty to
issue appropriate directions while granting such extension, including directions for
replacement of arbitrators.
3. Improving the overall functioning of arbitration: The 2015 Amendment Act also sought
to bring various improvements in the overall governance of arbitration and make it a
more appealing to the public at large. Such changes included creating a model fee
schedule for arbitrators to limit expenses, setting up mechanisms to ensure neutrality and
impartiality of arbitrators.
IV) Amendment of 2019
Even though the 2015 Amendment Act, brought a new lease of life to arbitration, it failed to
promote institutional arbitration in India and make it a hub for international commercial
arbitration. Institutionalised arbitration in India is still lacking and it has led to parties electing
foreign seats like Singapore, Hong-Kong for arbitration.
The 2019 Amendment Act was introduced with a specific focus on promoting institutional
arbitrations in India. To promote such institutional arbitration, the Act vested the power of
appointing arbitrators solely with arbitral institutions designated by the Supreme Court or the
High Court. The Amendment Act also created an apex body for arbitration, the Arbitration
Promotion Council of India (“APCI”), consisting of different stakeholders, for the purpose of
monitoring and promoting arbitration in India.
However, these changes related to institutional arbitration and creation of APCI are yet to be
notified.
IV) Conclusion
The arbitration regime in India has witnessed several changes since its inception and continues to
evolve constantly. The recent amendments of 2015 and 2019 along with various judicial
pronouncements over the last 5 years have contributed significantly to the growth of arbitration
as an efficacious alternative to traditional court litigation. Certain areas like institutional
arbitration still require some attention, but considering the current trend we can be hopeful that
these issues will be resolved sooner than later.

History Of Arbitration Law In India

Frances Kellor, the only female founder of the American Arbitration Association, in her book,
“American Arbitration: Its History, Functions, and Achievements” has put it briefly about
arbitration and she said “Of all mankind's adventures in search of peace and justice, arbitration is
amongst the earliest. Long before laws were established, or courts were organized, or judges
formulated principles of law, men had resorted to arbitration for the resolving of discord, the
adjustment of differences, and the settlement of disputes.”

According to the biblical theory, King Solomon was the first arbitrator who settled the issue between
two women who were claiming to be the mother of a baby boy. The assertions made by a few are
also that the procedure used by King Solomon was similar to that used in arbitrations today.

Arbitration was also used by Philip the Second, the father of Alexander the Great, for the settlement
of territorial disputes in Greece as far back as 337 B.C. In later times, arbitration owed its beginnings
to commercial disputes as it started with trade disputes being resolved by peers as early as the
Babylonian days.

In India, the arbitration was conceived in the system called the Panchayat. Indian civilization
encouraged the settlement of differences by tribunals chosen by the parties themselves. The course
of arbitration flourished in India since the end of the nineteenth century. Arbitration in India was
recognized by more specific legislation, the Indian Arbitration Act, 1899. However, it was confined
only to the three presidency towns i.e. Madras, Bombay, and Calcutta.

Further, arbitration was codified in Section 89 and Schedule II of the Code of Civil Procedure, 1908.
According to Section 89 and Schedule II of the Code of Civil Procedure, 1908 the provisions of
arbitration were extended to apply to different regions of British India to which the Act of 1899 was
not extended.

Development Of Arbitration Law In India

After tracing the history of the Arbitration Law in India, it is also important to understand how the
Indian Arbitration Law had evolved and developed to align with the foreign arbitration laws. This
would help India achieve its long-term dream of becoming an arbitration hub.

The arbitration law has evolved itself with the changing circumstances and therefore, the law has
evolved from the Arbitration Act, 1940 to the recent Arbitration and Conciliation (Amendment) Act,
2019 in the following manner:

1. Arbitration Act, 1940

However, the Act of 1899 and the provisions of the Code of Civil Procedure, 1908 were
injudicious and more technical, and thus, Arbitration Act, 1940 came into existence and
repealed the earlier Arbitration Act, 1899 along with the relevant provisions of the Code of
Civil Procedure, 1908. The prominent feature of the Arbitration Act, 1940 was that it only
dealt with domestic arbitrations but was unsuitable to the enforcement of foreign awards. The
Arbitration Act, 1940 failed to serve the purpose as its working was far from satisfactory.

The arbitral regime then was premised largely on a mistrust of the arbitral process, and the
same was the subject of much adverse comment by the courts. The Hon'ble Supreme Court
in F.C.I. v. Joginderpal Mohinderpal, had observed that the law of arbitration should be made
simple, less technical, and more responsible and should be responsive to the canons of
justice and fair play and make the arbitrator adhere to such process and norms which will
create confidence, not only by doing justice between the parties but by creating a sense that
justice appears to have been done.

Justice D.A. Desai of the Hon'ble Supreme Court in Guru Nanak Foundation v Rattan Singh ,
voiced the ineffective working of the Arbitration Act, 1940 wherein he laconically stated:

"Interminable, time-consuming, complex, and expensive court procedures impelled jurists to

search for an alternative forum, less formal, more effective, and speedy for resolution of
disputes, avoiding procedural claptrap and this led them to Arbitration Act, 1940. However,
the way in which the proceedings under the Act are conducted and without exception
challenged in courts has made Lawyers laugh and legal philosophers weep."

The Arbitration Act, 1940, did not deal with enforcement of foreign awards and therefore, a
separate law, Foreign Awards (Recognition and Enforcement) Act, 1961 was enacted for the
enforcement of awards under the Geneva Convention, 1927 and New York Conventions to
which India was a signatory.

However, the working of this legislation was also found to be unsatisfactory due to judicial
 intervention. In 1977, the functioning of the 1940 Act was questioned and examined by the
Law Commission of India on grounds of delay and hardship caused due to clogs that affect
smooth arbitral proceedings.

The Commission recommended amendment of certain provisions of the Act rather than
reworking the entire framework. Consequently, the Arbitration and Conciliation Act, 1996,
based on the 1985 United Nations International Commission on International Trade Law
(UNICTRAL) model law and rules, was enacted.
2. Arbitration and Conciliation Act, 1996
Even though the Arbitration Act, 1940 attracted severe criticism from the bar ad the bench,
no amendments were brought in to improve the working of the 1940 Act. In 1991, after the
major economic reform, steps were taken to attract foreign investment which required a
comfortable business environment and ease of doing business. It is for this reason,
Arbitration and Conciliation Act, 1996 was brought into force and it repealed the Act of 1940.
Interestingly, the Act of 1996 was based on UNCITRAL Model Law on International
Commercial Arbitration, 1985, and covered both domestic and international arbitration. The
main reason for introducing the Act of 1996 was to curb delays in arbitration and strengthen
the confidence of the foreign investors in ease of doing business.

Conversely, there was a conflict in the working of the Arbitration and Conciliation Act, 1996.
The controversy arose because the Hon'ble Supreme Court of India in Bhatia International v.
Bulk Trading S.A. and Another held that Part I of the 1996 Act will apply even to arbitrations
seated outside India unless it was expressly or impliedly excluded. Yet, on a similar question
of law, the Hon'ble Supreme Court of India in:

i. Venture Global Engineering v Satyam Computer Services Ltd.,

ii. Indtel Technical Service v. W.S. Atkins,
iii. Citation Infowares Ltd. v. Equinox Corporation,
iv. Dozco India v. Doosan Infrastructure, and
v. Videocon Industries v. Union of India,

had held that part I of the 1996 Act would apply to the foreign arbitrations seated outside.

The above decisions of the Hon'ble Supreme Court of India were widely criticized for
adopting a regressive approach as it increased judicial intervention even in the foreign
seated arbitration. However, after a decade the Hon'ble Supreme Court settled this issue
in Bharat Aluminium and Co. v. Kaiser Aluminium and Co., (herein referred to as
BALCO) wherein it held that that Part I of the Act does not apply to Part II of the Act as Part I
and Part II were mutually exclusive of each other. The effect of BALCO judgment was that
the Courts in India could not entertain interim applications under Section 9 of the Act in
foreign seated arbitrations that were governed by Part II of the Act.

However, the Arbitration and Conciliation Act, 1996 suffered from various problems including
high costs and too much intervention of Courts. Under the 1996 Act, if an application u/s 34
of the Act was made to set aside an award, it would make an award inexecutable. Because
the moment a section 34 application was filed, an automatic stay would be granted on the
execution of the award.

Further, there was no time limit within which the arbitrator had to make an arbitral award, due
to which, arbitral proceedings continued for years. Another issue with the 1996 Act was that
 the cost involved in Arbitration was sometimes even more than the cost of litigation or the
relief sought and thus was against the ethos of the Act of 1996.
 

3. The Arbitration and Conciliation (Amendment) Act, 2015

To consider the issues such as costs, delay, judicial intervention the Ministry of Law and
Justice invited suggestions from eminent lawyers, jurists, and legal experts of the country
regarding the functioning of the Act of 1996. Thereafter, the Arbitration and Conciliation
(Amendment) Act, 2015 was passed and certain amendments were made to the 1996 Act.

Some important amendments were made in the Arbitration and Conciliation Act, 1996 not
only to correct the defects of the earlier law but also to make the present arbitration law in
line with the other foreign arbitration laws thereby focusing on achieving the objective of
making India an arbitration center.

Some major amendments which were made are as follows:

i. A proviso to Section 2(2) was added which provided that subject to an agreement to
the contrary, the provisions of Sections 9, 27 and clause (a) of sub-section (1) and
sub-section (3) of Section 37 shall also apply to international commercial arbitrations.
ii. Section 9 was also amended to state that once the arbitral tribunal is constituted, the
Court shall not entertain an application unless circumstances demand so, thereby,
minimizing the intervention of the Court.
iii. Section 17 was also amended which gave the arbitral tribunal all powers of the Court
under Section 9.
iv. The time limit for making an arbitral award was also fixed to be twelve months after
the arbitral tribunal was constituted and this was inserted in the Act of 1996 by virtue
of Section 29A (2015 amendment).
v. Section 34 of the Act of 1996 was also amended and the scope of interference by
Courts was reduced.

Despite the amendments, a key issue which was brought about by the 2015
amendment was that whether Section 36(2) applied to pending arbitral proceedings
under Section 34 of the Act. But the issue was settled by the Hon'ble Supreme Court
in Board of Control for Cricket in India v. Kochi Cricket Pvt. Ltd. (herein referred to
as BCCI) wherein it held that the amended section 36 applied even to pending
section 34 applications on the date of commencement of the Arbitration Amendment
Act, 2015.

In BCCI judgment (supra), the Hon'ble Supreme Court had also stated the effect of
Section 87 of the proposed Arbitration and Conciliation (Amendment) Bill, 2018 and
said that the same would set the clock in an anti-clockwise direction and would be
contrary to the objective of the Amendment Act, 2015. Despite the findings of the
Hon'ble Supreme Court, the Parliament introduced Section 87 by Arbitration and
Conciliation (Amendment) Act of 2019.

Subsequently, the vires of Section 87 was challenged in Hindustan Construction

Company Limited v. Union of India and the Hon'ble Supreme Court struck down
the insertion of Section 87 to Arbitration and Conciliation (Amendment) Act, 2019 as
manifestly arbitrary and against the ethos of the objective that was sought to be
achieved by the principle act.
 A long controversy concerning unilateral appointments was also been put to rest by
the Hon'ble Supreme Court in Perkins Eastman Architects DPC & Anr. V. HSCC
(India) Ltd wherein the Court held that a person who has an interest in the outcome
or decision of the disputes should not have the power to appoint a sole arbitrator.
 
o The Arbitration and Conciliation (Amendment) Act, 2019
The Arbitration and Conciliation (Amendment) Act, 2015 though addressed a large
number of issues, certain issues still prevailed in the arbitral process, one such issue
being lack of institutional arbitration culture in the country as most of the arbitrations
were ad hoc. The intent of the government was to make India a center for domestic
and international arbitration and consequent to which a High-Level Committee,
headed by Justice B.N. Srikrishna, Retired Judge, Supreme Court of India, was
constituted to review the institutionalization of arbitration mechanisms in India.

Subsequent to which, on 9th August 2019, the Arbitration and Conciliation

(Amendment) Act, 2019 was passed. The main objective of this amendment was the
implementation of an effective arbitration structure, promote institutional arbitration,
and to resolve some uncertainties resulting from the 2015 amendment.

Some of the most crucial amendments are as follows:

i. Arbitration Council of India (ACI) was introduced for the advancement of various
forms of alternative dispute resolution like conciliation, mediation, and arbitration and
to promote institutional arbitration in the country.
ii. A mandatory grading of the arbitral institutions by the ACI was also introduced.
iii. A time period of 30 days for the appointment of an arbitrator, from the date of
acceptance of the request, by the arbitral institutions was also made compulsory.
iv. The Eighth Schedule was also inserted which provided various norms, qualifications,
and experiences for endorsement of arbitrators.
v. Section 29 A was amended to modify the timelines for carrying out the process of
arbitration as a step towards a swift resolution.

The 8th Schedule as inserted by the Amendment Act of 2019 specified that a person shall not be
qualified to be an arbitrator unless he is an advocate within the meaning of the Advocates Act, 1961
having ten years of practice experience as an advocate. This clause raised several doubts as to
whether this applied even to the foreign arbitrators or not.

The same was answered by the Hon'ble Law Minister in a clarification that the 8th schedule did not
apply to international commercial arbitrations. But be that as it may, the Arbitration and Conciliation
(Amendment) Act, 2019 is progressive in nature and has given more clarity to the Arbitration and
Conciliation (Amendment) Act, 2015.

Arbitration may be defined as the process by which a dispute or difference between two or more
parties as to their mutual legal rights and liabilities is referred to and determined judicially and with
binding effect by the application of law by one or more persons (the arbitral tribunal) instead of by a
court of law[1]. Arbitration is only an alternative to litigation and it does not replace the judicial
machinery in all aspects, rather it co-exists with it.

The object of arbitration is to provide fair and impartial resolution of disputes without causing
unnecessary delay or expense and at the same time, it allows freedom to the parties to agree upon
the manner in which their disputes should be resolved, subject only to safeguards imposed in public
interest. Today, arbitration is a very popular mode of alternate dispute resolution in the commercial
world and one can find an arbitration clause incorporated in the majority of business contracts. The
project deals with two forms of arbitration namely, ad hoc and institutional arbitration, their
advantages and disadvantages over each other.

Parties are entitled to choose the form of arbitration, which they deem appropriate in the facts and
circumstances of their dispute. This necessarily involves the consideration & evaluation of the
various features of both forms of arbitration and this can be a daunting task, as both forms have their
own merits and demerits.

Ad hoc arbitration

An ad hoc arbitration is one which is not administered by an institution and therefore, the parties are
required to determine all aspects of the arbitration like the number of arbitrators, manner of their
appointment, procedure for conducting the arbitration, etc.

Ad hoc arbitration is a proceeding that is not administered by others and requires the parties to make
their own arrangements for selection of arbitrators and for designation of rules, applicable law,
procedures and administrative support. Provided the parties approach the arbitration in a spirit of
cooperation, ad hoc proceedings can be more flexible, cheaper and faster than an administered
proceeding. The absence of administrative fees alone make this a popular choice.
The arbitration agreement, whether arrived at before or after the dispute arises, might simply state
that "disputes between the parties will be arbitrated", and if the place of arbitration is designated, that
will suffice. If the parties cannot agree on arbitral detail, all unresolved problems and questions
attending implementation of the arbitration, for example "how the arbitral tribunal will be appointed",
"how the proceedings will be conducted" or "how the award will be enforced" will be determined by
the law of the place designated for the arbitration, i.e., the "seat" of the arbitration. Such an
abbreviated approach will work only if the jurisdiction selected has an established arbitration law.
The ad hoc proceeding need not be entirely divorced from its institutional counterpart. Oftentimes
the appointment of a qualified and/or impartial arbitrator (actual or perceived) constitutes a sticking
point in ad hoc proceedings. In such case, the parties can agree to designate an institutional
provider as the appointing authority. Further, the parties can at any time in the course of an ad hoc
proceeding decide to engage an institutional provider to administer the arbitration.

Parties wishing to include an ad hoc arbitration clause in the underlying contract between them, or
seeking to arrive at terms of arbitration after a dispute has arisen, have the option of negotiating a
complete set of rules, establishing procedures which fit precisely their particular needs. Experience
has shown that this approach can require considerable time, attention and expense without
providing assurance that the terms agreed will address all eventualities.

Other options available to parties wishing to proceed ad hoc, who are not in need of rules drawn
specially for them, or of formal administration and oversight, include:
(i) adaption of the rules of an arbitral institution, amending provisions for selection of the arbitrator(s)
and removing provisions for administration of the arbitration by the institution,
(ii) incorporating statutory procedures such as the United States Federal Arbitration Act (or
applicable state law) or the English Arbitration Act 1996,
(iii) adopting rules crafted specifically for ad hoc arbitral proceedings such as the UNCITRAL Rules
(U.N. Commission on International Trade Law) or CPR Rules (International Institute for Conflict
Prevention and Resolution), which may be used in both domestic and international disputes, and
(iv) adopting an ad hoc provision copied from another contract. Risks accompanying two of the
available options are worthy of particular note.

Incorporating rules drawn by an institutional arbitration provider, amending provisions for

appointment of the arbitrator(s) and excising provisions requiring administration by the provider,
carries with it the risk of creating ambiguities in the institutional rules as amended, despite efforts to
redraw them to suit an ad hoc proceeding. It is also possible that in the adaptation process the
parties may inadvertently create an institutional process. Copying an ad hoc arbitration clause from
another contract may also result in later grief if the purloined clause was originally crafted for a
particular, possibly unique, set of circumstances and/or was drafted taking into account different
applicable arbitration law.

Advantages
Properly structured, ad hoc arbitration should be less expensive than institutional arbitration and,
thus, better suit smaller claims and less affluent parties. Ad hoc arbitration places more of a burden
on the arbitrator(s), and to a lesser extent upon the parties, to organize and administer the arbitration
in an effective manner. A distinct disadvantage of the ad hoc approach is that its effectiveness may
be dependent upon the willingness of the parties to agree upon procedures at a time when they are
already in dispute. Failure of one or both of the parties to cooperate in facilitating the arbitration can
result in an undue expenditure of time in resolving the issues. The savings contemplated by use of
the ad hoc arbitral process may be somewhat illusory if delays precipitated by a recalcitrant party
necessitate repeated recourse to the courts in the course of the proceedings.

1. The primary advantage of ad hoc arbitration is flexibility, which enables the parties to decide upon
the dispute resolution procedure. This necessarily requires a greater degree of effort, co-operation
and expertise of the parties in determination of the arbitration rules. Very often, the parties may
misunderstand each other since they are of different nationalities and come from different
jurisdictions, and this can delay the arbitration. Also, once a dispute arises, parties tend to disagree
and lack of co-operation required may frustrate the parties' intention of resolving their dispute by ad
hoc arbitration.
Such situations can be avoided, if the parties agree that the arbitration should be conducted under
certain arbitration rules. This results in reduced deliberation and legal fees and also facilitates early
commencement of the arbitration, as the parties do not engage in the time consuming process of
determining complex arbitration rules. There are various sets of rules suitable to ad hoc arbitration,
of which the UNCITRAL rules are considered most suitable.

2. By reason of its flexibility, ad hoc arbitration is preferred in cases involving state parties who
consider that a submission to institutional arbitration devalues their sovereignty and they are
therefore reluctant to submit to institutional control. Ad hoc arbitration also permits the parties to
shape the arbitration in a manner, which enables quick and effective resolution of disputes involving
huge sums of public money and public interest. In the Aminoil[2] arbitration, conducted ad hoc, the
flexibility permitted the parties to define issues in a manner, which enabled quick resolution of the
dispute. Further, the adopted procedure provided that the parties would file their pleadings at the
same time. Consequently, neither party was a respondent, a title that parties resent when they
believe that they have justifiable claims against the other party. Also, the tribunal directed the state
party to lead the case on some issues and Aminoil to lead on other issues, depending on whom the
onus of proof laid 11.

3. Another primary advantage of ad hoc arbitration is that it is less expensive than institutional
arbitration. The parties only pay fees of the arbitrators', lawyers or representatives, and the costs
incurred for conducting the arbitration i.e. expenses of the arbitrators, venue charges, etc. They do
not have to pay fees to an arbitration institution which, if the amount in dispute is considerable, can
be prohibitively expensive. In order to reduce costs, the parties and the arbitrators may agree to
conduct arbitration at the offices of the arbitrators. It can be argued that such proposal would not be
acceptable to an institution, lest their reputation be tarnished.

4. In ad hoc arbitration, parties negotiate and settle fees with the arbitrators directly, unlike
institutional arbitration wherein the parties pay arbitrators' fees as stipulated by the institution. This
allows them the opportunity of negotiating a reduction in fees. But this involves an uncomfortable
discussion & in certain cases, the parties may not be able to negotiate a substantial reduction or for
that matter, any reduction at all. The arbitrators are the judges in the cause and no party desires to
displease the judge, even before the proceedings have commenced.

Ad hoc arbitrations may not be less expensive than institutional arbitration for a number of
reasons

Firstly, the parties are required to make arrangements to conduct the arbitration but they may lack
the necessary knowledge and expertise. It has been said that many laymen have to participate in
arbitration and many arbitrations have to be conducted by persons who are not lawyers. This would
result in misinformed decisions, especially in international commercial arbitration as the parties come
from different countries and consequently, in increased costs.
Secondly, where there is lack of co-operation between the parties or delay on part of the tribunal in
conducting the arbitration or in writing the award16, a party may seek court intervention and the
litigation costs negate not only the cost advantage of ad hoc arbitration but also the parties' intention
to arbitrate.

Thirdly, the tribunal may, in complex cases involving considerable administrative work, appoint a
secretary to administer the arbitration, whose fees will be borne by the parties and this adds to the
cost burden of the arbitration.

It can therefore, be said of ad hoc arbitration that if the required co-operation is forthcoming and the
parties are conversant with arbitration procedures or the arbitration is conducted by experienced
arbitrators, “the difference between ad hoc and institutional arbitration is like the difference between
a tailor-made suit and one that is bought off-the-peg”. That is to say, ad hoc arbitration is tailored to
the needs of the parties and is more cost effective than institutional arbitration.
Institutional arbitration

An institutional arbitration is one in which a specialized institution with a permanent character

intervenes and assumes the functions of aiding and administering the arbitral process, as provided
by the rules of that institution. It is pertinent to note that these institutions do not arbitrate the dispute,
it is the arbitrators who arbitrate, and so the term arbitration institution is inappropriate and only the
rules of the institution apply.

Often, the contract between the parties will contain an arbitration clause which will designate an
institution as the arbitration administrator. If the institutional administrative charges, which may be
substantial, are not a factor, the institutional approach is generally preferred. The primary
disadvantages attending the institutional approach are: (i) administrative fees for services and use of
facilities may be high in disputes over large amounts, especially where fees are related to the
amount in dispute. For lesser amounts in dispute, institutional fees may be greater than the amount
in controversy; (ii) the institution's bureaucracy may lead to added costs and delays and (iii) the
disputants may be required to respond within unrealistic time frames.

In institutional arbitration, the first issue arising for agreement of the parties is choice of the
institution, appropriate for the resolution of disputes, arising out of their contract. Whilst making such
choice, there are various factors to be considered i.e. nature & commercial value of the dispute,
rules of the institution as these rules differ, past record and reputation of the institution and also that
the institutional rules are in tune with the latest developments in international commercial arbitration
practice. There are many institutional arbitration administrators, some of which are associated with a
trade association and many of which are independent. The London Court of International Arbitration,
The Chartered Institute of Arbitrators (UK), The National Arbitration Forum (USA) and The
International Court of Arbitration (Paris) are four of many.

Care should be taken in the selection of an arbitral institution. There are approximately 1,200
institutions, organizations and businesses worldwide offering institutional arbitral services. Some are
excellent. Some are not as good. Some are bad. Many arbitral institutions are operating under rules
not artfully drawn or rules which may be applicable to a particular trade or industry, but not to the
existing or prospective needs of one or more of the parties. The greatest threat presented by the
less prestigious arbitral institutions is the possibility that the institutional provider will be unable to
deliver what motivated the parties to select institutional arbitration over ad hoc proceedings, i.e., a
proper degree of supervision, which often is the key to whether the arbitration will prove successful.

Advantages
The advantages of institutional arbitration to those who can afford it are apparent. Foremost are:
(i) availability of pre-established rules and procedures which assure that arbitration will get off the
ground and proceed to conclusion with dispatch;
(ii) administrative assistance from institutions providing a secretariat or court of arbitration;
(iii) lists of qualified arbitrators, often broken out by fields of expertise;
(iv) appointment of arbitrators by the institution should the parties request it;
(v) physical facilities and support services for arbitrations; (vi) assistance in encouraging reluctant
parties to proceed with arbitration and (vii) an established format with a proven record. In detail:

1. A merit of institutional arbitration is that it saves parties and their lawyers the effort of determining
the arbitration procedure and also the effort of drafting an arbitration clause, which is provided by the
institution. Once the parties choose the institution, all they need to do is incorporate the draft clause
of that institution into their contract. This expresses their intention to arbitrate under the institution's
rules, which provide for every conceivable situation that can arise in an international commercial
arbitration.

2. Another merit of the draft clause is that it is revised periodically by the institution, drawing on
experience in conducting arbitrations regularly and approved by arbitration experts, taking account of
the latest developments in arbitration practice. This ensures that there is no ambiguity in relation to
the arbitration process. On the other hand, ambiguous arbitration clauses in ad hoc arbitration
compel parties to seek court intervention in order to commence or continue the arbitration.

3. Another merit of institutional arbitration relates to selection of the arbitrators. In institutional

arbitration, the arbitrators are selected by the parties from the institution's panel of arbitrators. This
panel comprises of expert arbitrators, drawn from the various regions of the world and from across
different vocations. This enables selection of arbitrators possessing requisite experience and
knowledge to resolve the dispute, thereby facilitating quick and effective resolution of disputes.

Whereas in ad hoc arbitration, the appointment of arbitrators is generally based on the parties' faith
& trust in the arbitrators and not necessarily on the basis of their qualifications and experience. Thus,
an incompetent arbitrator may not conduct the proceedings smoothly and this could delay dispute
resolution, lead to undesirable litigation and increased costs.

However, it is pertinent to note that the parties do not appoint the arbitrators. They only select and
nominate the arbitrators for appointment by the institution, which may refuse to appoint a nominated
arbitrator if he lacks the requisite qualifications or impartiality or independence, in order to avoid its
reputation being tarnished. Consequently, a party whose nominated arbitrator was refused
appointment, being dissatisfied, may turn hostile and refuse to participate or attempt to stall the
arbitration.

4. Another merit of institutional arbitration is that the parties and the arbitrators can seek assistance
and advice from the institutional staff, responsible for administrating international commercial
arbitrations under the institutional rules. Thus, doubts can be clarified or a deadlock can be resolved
without court intervention. Whereas in ad hoc arbitration, the parties would be compelled to
approach the Court, in order to take the arbitration forward and consequently, the perceived cost
advantage of ad hoc arbitration would be negated by the litigation expenses. Also, the institutional
staff constantly monitors the arbitration to ensure that the arbitration is completed and an award is
made within reasonable time and without undue delay.

One of the advantages of arbitration is that it provides for final & binding determination of the dispute
between the parties. In other words, no review or appeal lies against an arbitral award to ensure
finality. This involves an inherent risk that mistakes committed by the tribunal cannot be corrected,
whereby one party would inevitably suffer. However, some institutional rules provide for scrutiny of
the draft award before the final award is issued and some provide for a review procedure. The latter
entitles the dissatisfied party to appeal to an arbitral tribunal of second instance, which can confirm,
vary, amend or set aside the first award and such decision in appeal is considered to be final and
binding upon the parties. Contrasting this to ad hoc arbitration where there is no opportunity for
appeal or review and the parties have to be prepared to suffer for the mistakes of the arbitrators, this
is a redeeming feature of institutional arbitration as it allows the parties a second chance of
presenting their case and also permits the rectification of mistakes made by the tribunal of first
instance. It also serves as a check on the actions of the arbitrators and restrains them from making
arbitrary awards.

It is also perceived that national courts tend to grant enforcement of awards made in institutional
arbitration, though doubts have been raised, since international arbitration institutions enjoy
worldwide recognition and their professional expertise adds to the certainty and finality of the
proceedings. Courts are more likely to even enforce an award obtained in default of the other party,
which they would refuse had it been obtained in ad hoc arbitration, in view of the strict arbitration
procedures followed by these institutions. One of the criticism of institutional arbitration is that,
parties need to comply with the procedural requirements, resulting in unnecessary delays in the
arbitration. One may argue that such requirements, in fact, avoid delay. For instance, the ICC draws
up the terms of reference, criticized as being time consuming and unnecessary, containing
provisions to ensure that default of a party does not stall arbitration. In default of a party in ad hoc
arbitration, the other party may seek court intervention to compel the defaulting party to commence
or continue the arbitration and this may result in longer delays, than that involved in complying with
these procedural requirements, intended to ensure smooth and effective dispute resolution.

Conclusion
It is said that the parties are the masters of the arbitration but in institutional arbitration, the
institutions virtually acquire certain powers of the parties' such as appointment of arbitrators, etc. and
are in a position to impose their will upon the parties. This seems to be against the very spirit of
arbitration and one may say that this is not arbitration in the true sense. Though ad hoc arbitration
would then be preferred, it can be argued that in today's modern and complex commercial world, ad
hoc arbitration is suitable only to disputes involving smaller claims and less affluent parties and to
domestic arbitrations, excepting where state parties are involved, for the reasons stated
hereinabove. One may quote in support thereof that “Whatever its merits in a purely domestic
situation, ad hoc arbitration in an international setting frequently frustrates the party seeking to
enforce the contract” since international commercial arbitrations involve complicated legal issues,
which parties coming from different jurisdictions may be unable to deal with.

In the context of international commercial disputes, one may argue that institutional arbitration is
more suitable, even though apparently it is more expensive, time consuming and rigid than ad hoc
arbitration, keeping in mind the fact that it provides established & updated arbitration rules, support,
supervision & monitoring of the arbitration, review of awards and most importantly, strengthens the
credibility of the awards. In conclusion, it is must be said that it is hard to claim that institutional
arbitration is superior to ad hoc proceedings or vice versa.