Arbitration: an institution?

This year features as an important one for dispute professionals in the UK and further afield, as Edinburgh hosts the largest international arbitration gathering in the world. The International Council for Commercial Arbitration (ICCA), accredited as an NGO by the United Nations, is holding its biennial conference in the capital, a little over 10 years after the installation of a modern regime for governing arbitrations in Scotland in the form of the Arbitration (Scotland) Act 2010 (which bears much similarity to the 1996 Arbitration Act for England & Wales).

Given the global nature of arbitration, the decision about which arbitral institution to opt for can be complex. So what are the roles of arbitral institutions, the benefits and costs of using an institution, and how do parties choose from the many institutions available to them?

What is an arbitral institution?

An arbitral institution is an organisation that manages arbitrations, usually under a standard set of arbitration rules published by the organisation. Although comprehensive figures are not available, it is estimated that more than 75% of international arbitrations are conducted under the supervision of an arbitral institution. Thousands of arbitral institutions exist worldwide, from well-known, long-established institutions such as the International Chamber of Commerce (“ICC”) and London Court of International Arbitration (“LCIA”), to smaller bodies specialising in particular sectors or jurisdictions.

An international arbitration managed by an arbitral institution can be contrasted with an ad hoc arbitration, in which the parties essentially agree to manage the arbitration themselves under bespoke rules to be confirmed by an arbitrator once appointed.

Why use an arbitral institution?

There are a number of reasons for using an arbitral institution to manage an international arbitration. Most large institutions have developed a set of arbitral rules which set the broad framework for the arbitrations they manage. This means that, at the time of agreeing to arbitration, parties have visibility and control over the basic rules that will apply to their arbitration.

These rules have been developed and updated regularly over time to respond to trends in the dispute resolution market as well as procedural problems that have arisen previously. A good example of this is recent amendments to the LCIA and ICC rules of arbitration in response to the growth of electronic hearings and document filings during the COVID-19 pandemic. An international arbitration managed under such rules is therefore less likely to encounter unanticipated problems. As well as greater certainty, this has the potential to deliver time and cost savings to the parties, as fewer procedural issues need to be escalated to the tribunal for resolution.

Many arbitral institutions also have recommended arbitration clauses, which parties can include in their contracts if they wish to use that institution to resolve their disputes. These clauses are prepared and regularly updated by the institutions’ lawyers to ensure their clarity and enforceability across jurisdictions, and therefore parties using such a clause can have confidence that their agreement to arbitrate will not be challenged. This is no small advantage, particularly in circumstances where a party’s reason for choosing arbitration is a desire to avoid litigating in the courts of a particular jurisdiction.

There can also be “softer” benefits of using an arbitral institution. Parties often feel that using an arbitral institution – particularly a longstanding, well-known one such as the LCIA or ICC – can lend additional weight to any award, whether that is for the purposes of enforcement in a particular jurisdiction or for political or PR purposes.

If there is a downside to using an arbitral institution, it is that the above benefits do not come without costs. In particular, arbitral institutions charge upfront fees to cover the administrative costs of running an arbitration as well as their background costs such as maintaining their arbitration rules and clauses.

However, overall the cost difference between institutional and ad hoc arbitration may be minimal. For any arbitration to run effectively, it will require clear rules and effective administrative support, and the upfront fees charged by an institution may be outweighed further down the line in an ad hoc arbitration by the costs of putting in place bespoke rules and dealing with any unanticipated procedural issues. Therefore, as always with arbitration, this is really a matter of party choice: incur administrative costs upfront on an institutional arbitration, or deal with them as they arise in an ad hoc arbitration.

Which arbitral institution should I choose?

There is no set formula that parties should apply when choosing which arbitral institution to use. It is also important to keep in mind that what will often be more important than the arbitral institution chosen is the parties’ choice of the “seat” of the arbitration. The seat is a geographical location, which will determine what procedural law will apply to the arbitration, what courts are responsible for applying that law, and the “nationality” of any award for enforcement purposes. For example, an arbitration naming the seat as London will be subject to the overview of the courts of England & Wales, and may be seen internationally as an English arbitral award.

Once the parties have chosen their seat of arbitration, they should consider which arbitral bodies would be well placed to administer an arbitration with that seat: which institutions have a proven track record of producing robust arbitral awards in that jurisdiction? In some cases this will lead to a straightforward choice: for example, a choice of London as the seat of an arbitration might well lead the parties to select the LCIA as their arbitral body. That said, the choice of seat is independent of the choice of arbitral institution: for instance, it is perfectly legitimate for parties to name London as their seat of arbitration but to choose the Paris-headquartered ICC as their arbitral institution if they have particular reasons for doing so (for example if they have used the ICC before and are familiar with and confident in its workings).

In some cases, however, more case-specific factors will apply. For example:

• Is the dispute likely to involve a particular technical specialism? If so, there are a plethora of specialist arbitral bodies to choose from, with prominent examples being the Court of Arbitration for Sport and the Paris Chamber of Maritime Arbitration.
• Is enforcement in a specific jurisdiction of particular importance to the parties? If so, and particularly if that jurisdiction has a less developed legal system, the parties would be well advised to take advice as to which institutions have strong track records of their awards being enforced in that country’s courts.

Cost can also be a factor. Although all arbitral institutions charge fees, some (particularly well-known, well-established institutions) may be higher than others. Similarly, different institutions calculate fees in different ways: some charge according to the value of the dispute, whereas others base their charges on the time their staff actually spend on the arbitration. In some cases, factors such as these can make a real difference to the cost of an arbitration.

The number and variety of arbitral institutions worldwide means that there will always be an arbitral institution – large or small – which is a suitable choice for parties to a potential dispute. Lawyers who are experienced in handling international arbitrations can advise at an early stage as to which arbitral body would be best placed to manage a dispute and ensure the certainty, flexibility and efficiency which are the hallmarks of international arbitration.