As arbitration rules, procedures and awards have become standardized and accepted in commercial transactions, contracting parties have increasingly moved to the use of ad hoc arbitrations, i.e., arbitrations that are not administered by an arbitral body such as the AAA or ICC, but by the arbitral tribunal itself. The principal motivation behind the increased use of ad hoc arbitration is the avoidance of the expense associated with administered arbitrations. Requirements such as review of proposed awards by administering institutions can also extend the period of time for obtaining a final award, which parties prefer to avoid.
Identifying Rules To Govern An Ad hoc Arbitration
The increased use of ad hoc arbitration raises issues for both the contract drafter and the practitioner managing the arbitration. An initial challenge for the contract drafter contemplating an ad hoc arbitration is to determine the rules that will be utilized by the parties to both appoint an arbitrator or panel of arbitrators and whether those rules will be used to govern the ad hoc arbitration proceedings. Although not necessary, parties typically designate a set of arbitration rules to provide a framework for the arbitrators to resolve procedural issues. In the United States, the American Arbitration Association Commercial or Construction Industry Rules are often chosen as such a framework for ad hoc arbitrations. Set forth below is a typical clause identifying a set of arbitration rules that would govern in an ad hoc arbitration:
[t]he arbitration shall be conducted in accordance with the then current Rules of the American Arbitration Association for Commercial Disputes, but the arbitration shall not be submitted to or administered by the Association.
Contract drafters should evaluate the extent to which the designation of a particular set of rules may give rise to a dispute regarding enforceability of the arbitration agreement. In a case involving a “hybrid” arbitration clause, i.e., a clause providing that a specified arbitral body would administer the arbitration using the rules of a different arbitral institution, the Singapore Court of Appeal upheld a clause that provided that “all disputes should be finally resolved by arbitration before the Singapore International Arbitration Centre in accordance with the Rules of Arbitration of the International Chamber of Commerce[.]” Insigma Technology Co. Ltd. v. Alstom Technology LTD  SGCA 24. While the Singapore Court gave effect to the parties’ clear intent to arbitrate in that case, the selection of the ICC arbitral rules resulted in a court challenge that delayed the arbitration. Notably, in the 2012 revisions to the ICC Rules and potentially in response to the Singapore Court, the ICC has made clear that it has sole jurisdiction to administer an arbitration using the ICC Rules, mandating that: “[b]y agreeing to arbitration under the [ICC] Rules, the parties have accepted that the arbitration shall be administered by the [International Court of Arbitration]. See ICC Rule 6.2. Thus, contracting parties should pay particular attention to the contents of any proposed rules in either a hybrid or ad hoc arbitration clause in order to avoid fodder for a court challenge to the arbitration agreement itself.
Arbitrator Selection In Ad hoc Arbitration
A primary concern in an ad hoc arbitration is the method of selection of the arbitrator or panel of arbitrators, with the most significant question being whether the parties will appoint the arbitrators or use an appointing authority. In the case of a single arbitrator, an appointing authority as either a starting point or fallback position is necessary to avoid the decision defaulting to a court in the event of the parties’ deadlock on the selection of the arbitrator. Many arbitral institutions are willing to act as only an appointing authority in exchange for payment. Thus, parties might agree to identify the appointing authority in their contract and then select the sole arbitrator from a list of qualified arbitrators provided by the appointing authority, either by striking or ranking the potential arbitrators. A clause describing that process is set forth below:
[t]o select the arbitrator, the Parties shall alternately strike names from a list of arbitrators knowledgeable or experienced in the industry obtained from the AAA or other agreed upon source, with the Party furnishing the Notice of Arbitration striking first, until one Person’s name remains on such list. Such Person shall become the arbitrator of the matter.
In the case of a panel of arbitrators, it is commonly accepted in most jurisdictions and under the majority of current arbitral rules that party-appointed arbitrators are required to act as neutrals in the arbitration and rendering of the final award. See ICC Rule 11.1 (2012)(“Every arbitrator must be and remain impartial and independent of the parties involved in the arbitration.”). Neutral party appointed arbitrators who then select a Chairperson between themselves are becoming increasingly common in ad hoc arbitrations. These clauses are straight-forward and typically provide for the following:
[e]ach Party shall appoint one Party neutral arbitrator, and the two arbitrators shall mutually agree on the appointment of the third arbitrator who shall have at least fifteen (15) years of relevant experience and who shall act as the chairman of the panel.
In the event that the arbitration agreement provides for party-appointed arbitrators, the practitioner in anad hoc arbitration will have to consider whether to contact a prospective candidate regarding his or her potential appointment. This decision is easiest when operating under rules that make clear that such contacts are appropriate if they are limited in scope. For example, Rule 21(a) of the 2009 Construction Industry Rules and Rule 18(a) of the 2009 AAA Commercial Arbitration Rules provide that a potential arbitrator may be contacted about qualifications, availability, independence and potential chairperson candidates:
[n]o party and no one acting on behalf of any party shall communicate ex parte with an arbitrator or a candidate for arbitrator concerning the arbitration, except that a party, or someone acting on behalf of a party, may communicate ex parte with a candidate for direct appointment pursuant to Section R-12 in order to advise the candidate of the general nature of the controversy and of the anticipated proceedings and to discuss the candidate’s qualifications, availability, or independence in relation to the parties or to discuss the suitability of candidates for selection as a third arbitrator where the parties or party-designated arbitrators are to participate in that selection.
The AAA Rules recited above codify the recommended practice that has been propounded by several international and domestic arbitral institutions. Canon III of the 2004 Revision of the ABA/AAA Code of Ethics for Arbitrators in Commercial Disputes provides for limited ex parte communications, restricted to identity of the parties, general nature of the case, suitability for appointment, and the choice of the chairperson. Rule 5.1 of the International Bar Association Rules similarly provides that “a prospective arbitrator . . .may. . . respond to enquiries from those approaching him, provided that such enquiries are designed to determine his suitability and availability for the appointment and provided that the merits of the case are not discussed.” The Chartered Institute of Arbitrators addresses the interview process of prospective arbitrators in its lengthy Practice Guideline 16, which provides in pertinent part that the following topics may not be discussed: the specific facts or circumstances giving rise to the dispute; the positions or arguments of the parties or the merits of the case. Guideline 16 goes on to discuss the merits of tape recording the interview session and taking steps to maintain the professional and objective nature of the exchange of information in order to avoid a potential challenge to the arbitrator’s partiality.
With the increasing popularity of ad hoc arbitration, sophisticated contracting parties will continue to refine the “do it yourself” arbitration process. Informed selection of appropriate rules and an understanding of the best practices and ethical considerations in the arbitrator selection process are essential to ensuring an enforceable agreement and enforceable award in such arbitrations.
Shelly Ewald teaches a course in International Commercial Arbitration and coaches the Vis International Commercial Arbitration Moot at George Mason University.
The information or opinion provided in this article is the author’s own and not necessarily that of Watt, Tieder, Hoffar & Fitzgerald, LLP. The author is solely responsible for the information and opinion that he or she has provided. The information contained herein does not replace seeking specific legal counsel to directly address individual client needs.