Arbitration may be defined as the process by which any dispute or difference between two or more than two parties as per their mutual legal rights and liabilities is referred to and is determined judicially and with a binding effect by the application of the law by one or more persons (the tribunal) instead of by the court of law. Arbitration is just an alternative to litigation and it cannot replace the judicial machinery in any aspect, instead, it co-exists with it.
The objective of arbitration is to give a fair and impartial resolution to disputes without causing an unnecessary delay or expense, it also gives freedom to the parties to agree upon the manner to be resolved, subject to safeguards imposed in the public interest. In today’s time, arbitration is an extremely popular mode of alternate dispute resolution in the commercial world and can found as a clause incorporated in a majority of business contracts.
Ad hoc arbitration:
An ad hoc arbitration is that which is not administered by any institution and hence, the parties are required to determine all aspects of the arbitration such as the procedure for conducting the arbitration number of arbitrators, manner of their appointment, etc.
Ad hoc arbitration is not just administered by others, it requires the parties to make their arrangements for the selection of arbitrators, for designation of rules, applicable law, procedures, and administrative support, provided the parties approach it in a spirit of cooperation, ad hoc proceedings may be more flexible, cheaper and faster than the administered proceeding. The absence of administrative fees alone makes this type a popular choice.
Institutional arbitration is that in which any specialized institution with permanent character intervenes and assumes the function of aiding and administering the process, as provided by rules of that particular institution. It is important to note that these institutions do not arbitrate the dispute, but it is the arbitrators who arbitrate, and so the term used as of arbitration institution is not appropriate and only the rules of that institution are applicable.
It can be said that the parties are the real masters of the process of arbitration but in institutional arbitration, the institution virtually acquires certain powers of the parties like the appointment of the arbitrators, and hence are in a position to impose their will onto the parties. This does go against the very spirit of arbitration and one can say that this is not arbitration in its true sense. Although ad hoc arbitration would then be preferred, it might be argued that in today's modern and complex commercial world, ad hoc arbitration is suitable only for disputes involving small claims and less affluent parties to domestic arbitrations, excepting where the state is to be involved, for the reasons stated above. One may quote in support that “Whatever it’s merits are in a purely domestic situation, ad hoc arbitration in an international setting can frequently frustrate the party seeking to enforce the contract” as various international commercial arbitrations compose of various issues which are complicated, wherein the parties coming from different jurisdictions are not able to deal with.
In the context of international disputes, one can argue that institutional arbitration is much suitable, even though it is more expensive, time-consuming and rigid than the ad hoc arbitration, keeping in mind the that it provides established & updated arbitration rules, support, supervision and monitoring of arbitration, review of the awards and most importantly, strengthens the credibility of the awards. In conclusion, it should be said that it is very hard to claim that institutional arbitration is superior to ad hoc proceedings or vice versa
 Halsbury's Laws of England, (Butterworths, 4th edition, 1991) paragraph 601,332.