In an arbitration proceeding, the disputing parties will designate one or more individuals as arbitrators or an arbitral tribunal. The parties agree to be bound by their ruling or award. In the context of international business transactions, arbitration is frequently used to settle commercial disputes.The process of arbitrating a dispute involves one or more impartial third parties, usually chosen by the opposing parties, whose judgment is final. Arbitration processes are governed by the laws of the arbitration venue, or Lex Arbitri, which are typically general and non-specific. There are two types of arbitration proceedings: ad-hoc and institutional.
Ad hoc arbitration is set up between the parties privately. The parties establish the procedure, choose their arbitrators and determine the necessary applicable rules and laws. Ad hoc processes are easy to adapt, less expensive, and quicker than an administrative hearing. As long as the parties are co-operative, the process should be a smooth one.
An institutional arbitration is conducted under the auspices of an organizational structure out of which arbitrators are appointed. The institution has regulations according to which the arbitration will be done. It takes on the duties of supporting and overseeing the arbitral process. It is important to keep in mind that these organisations do not arbitrate disputes; instead, arbitrators do so.
The institutional approach is typically selected if the institutional administration costs, which may be significant, are unimportant. The first issue that arises for agreement between the parties in institutional arbitration is choosing a suitable institution for their type of contractual dispute. Several factors, including the nature and commercial value of the dispute, the institution's rules (which vary), past performance and reputation of the institution, and whether or not the institutional rules are updated according to international trends are to be taken into account. There are numerous administrators of institutional arbitration, some of which are connected to trade associations, and many of which are independent. These institutions include The National Arbitration Forum (USA), The Chartered Institute of Arbitrators (UK), The London Court of International Arbitration, and The International Court of Arbitration (Paris).
In practice, ad-hoc and institutional arbitration are not mutually exclusive. A common sticking point in ad hoc proceedings is the real or perceived nomination of a qualified and/or unbiased arbitrator. The parties may agree to name an institutional provider as the appointing authority in such a situation. Additionally, during an ad hoc proceeding, the parties may choose to engage an institutional provider to handle the arbitration's administration at any time.
It is believed that the parties are the lords of the arbitration, but under institutional arbitration, the institutions effectively take on the parties' authority to make decisions and choose arbitrators, among other things. Ad hoc arbitration would then be preferred, but it can be argued that, for the reasons outlined above, it is only appropriate for domestic arbitrations, with the exception of cases involving state parties, and disputes involving smaller claims and less wealthy parties. Even though institutional arbitration appears to be more expensive, time-consuming, and rigid than ad hoc arbitration, one could argue that it is more appropriate in the context of international commercial disputes because it offers established and updated arbitration rules, support, supervision, and monitoring of the arbitration, reviews of awards, and, most importantly, strengthens the credibility of the awards.