Legal Journal

Ad-Hoc and Institutional Arbitration on Investment Agreements

The investors mostly invest high amount of capital under an investment project and therefore they seek to secure themselves and their investments by contractual provisions which include arbitration clause. Arbitration is usually preferred rather than local court proceedings since (i) it is a faster solution for the investor who desire to protect his investment, (ii) the will of the parties can play a more effective role, (iii) the parties may agree upon the law rather than the law of forum; such as the law which includes more effective and detailed regulations on the subject of investment.

The leading institutional arbitration center which is preferred for resolving commercial disputes is International Chamber of Commerce International Court of Arbitration (“ICC”). The parties who desire to determine the institutional arbitration mechanism usually issue an arbitration clause which stipulates resolution before ICC. In case of ad-hoc arbitration, the parties often prefer to incorporate the UNCITRAL Arbitration Rules into the agreement between them. Institutional and ad-hoc arbitration both have advantageous and disadvantageous sides when they are compared to each other. Therefore, it is recommended that the parties issue an arbitration clause or execute an arbitration agreement which is suitable for them and the dispute by considering these advantages/ disadvantages. Some of these advantages/disadvantages are as follows:

Conditions of Arbitration: Ad-hoc arbitration is basically based on the parties’ will and control. It is a model where the parties have a high degree of discretion and control over the arbitration process. Therefore, it is advantageous at many points compared to institutional arbitration in terms of meeting the expectations of the parties. However, it is a challenging process for the parties to make detailed regulations with regards to ad-hoc arbitration process such as law to be applied to the arbitration, language and place of arbitration and number of arbitrators and to agree on each of these details. This might be considered as disadvantageous side of ad-hoc arbitration. In institutional arbitration, the conditions of arbitration are regulated in detail. Besides, arbitration institutions often have authorization to control over and interference with the conditions of arbitration. This situation prevents the delays due to the inexperience of the parties and leads the parties to choose ad-hoc arbitration in some specific disputes due to the fact that it decreases the effectiveness of parties’ will.

Costs of Arbitration: In addition to all other expenses in institutional arbitration, administrative expenses arise from the operations carried out by the institution itself and from the control and intervention of the institution. The amount of these costs is determined by the amount of the dispute and increase as the amount of the dispute increases. In case of an arbitration proceeding before the ICC, administrative costs may increase up to 150,000 USD depending on the value of the dispute. Since ad-hoc arbitration does not involve any institution, there are no administrative payments to be made. However, ad-hoc arbitration is a consensus-based model. Therefore, this way may also be expensive due to delays based on failure of the parties to compromise. Moreover, in case of ad-hoc arbitration, the parties may also determine that the arbitrators can determine their own fees, which may also lead to an increase in costs.

Time Limit: In ad-hoc arbitration, it is not always possible to foresee all of the conditions of arbitration mentioned under the “Conditions of Arbitration” above. In addition, it is only possible for the parties to agree on these issues afterwards, if the parties have a conciliatory attitude. Consequently, when the parties could not reach an agreement, this may prolong the arbitration process and may create a need for court intervention. On the other hand, a time limit has not been regulated for final award in the UNCITRAL Arbitration Rules. Therefore, if the parties do not determine the time limit for getting the final award in the arbitration agreement, it would make it difficult to obtain the expected benefit (quick solution) from the arbitration in the first place. In institutional arbitration, usually all time periods are determined by the arbitration rules of the relevant institution. As an instance, according to the ICC Arbitration Rules, the arbitrators are given a six-month period to make the final award.

Objectivity: The parties usually do not familiar with the arbitrators who are assigned for arbitration proceedings in institutional arbitration. On the other hand, according to the ICC Arbitration Rules, when the dispute is resolved by three arbitrators, each party nominates one arbitrator “for the Court's confirmation” and the Court asks the arbitrators to submit their declarations of independence and impartiality before confirming the appointment of the arbitrators. Such procedures under institutional arbitration assure impartiality of the arbitrators and constitute a reason for preference of institutional arbitration by the parties.

Av. Nihan Malkoçer