SCC Guide to Dispute Resolution: Institutional arbitration vs. ad hoc arbitration

Understanding the key differences between litigation and arbitration, as well as institutional and ad hoc arbitration is crucial for making informed dispute resolution decisions. This guide explores the two forms of arbitration to help entities choose the most appropriate approach for resolving their disputes.

First, the guide defines the different types of arbitration, followed by an analysis of key differences covering procedural frameworks, administrative support, costs, arbitrator selection, and quality control. Second, the advantages and disadvantages of each approach are presented, providing guidance on when to choose each arbitration form. Finally, a hybrid solution is introduced that combines ad hoc arbitration with institutional support, followed by an FAQ.

What is institutional arbitration?

Institutional arbitration is a form of dispute resolution where parties agree to submit their dispute to an arbitration institute, typically by referring to the institution and its rules in the arbitration agreement. The institutional rules are pre-established and govern the proceedings which the parties have agreed to follow, provided they do not conflict with any mandatory provisions of the law governing the proceedings, typically the law of the seat of arbitration.

The institution acts as a neutral administrator that provides comprehensive administrative support throughout the entire process. In SCC arbitrations, the dispute is administered by the SCC. The administration includes decisions on appointments of arbitrators, the costs of the arbitration and time limit for rendering the award. In SCC arbitrations, parties and tribunals are also provided with a web-based case management platform (the SCC Platform), fund-holding services, and continuous support from the SCC Secretariat.

Read more about SCC arbitration.

What is ad hoc arbitration?

Ad hoc arbitration is a form of dispute resolution where parties agree to arbitrate without appointing an arbitration institute to administer the proceedings under its rules. The parties have the autonomy and the responsibility to manage every aspect of the proceedings independently, without relying on the procedural framework of an arbitration institute, provided this does not conflict with any mandatory law of the seat of arbitration. This typically includes to establish procedural rules, determine the format and schedule hearings, manage communications, handle document exchanges, hold funds and coordinate all interactions between the parties and the arbitrators. The defining characteristic of ad hoc arbitration is its self-administered nature. Although the parties and the arbitral tribunal are responsible for coordinating all aspects of the process, they may seek external administrative support from an arbitration institute to ensure smooth proceedings. This form of arbitration offers maximum flexibility but simultaneously requires cooperative arbitrators and counsel to carefully coordinate and administer the case to ensure efficient proceedings. As can be expected from such a structure, this also creates opportunities for a troublesome party to obstruct and delay the arbitration process.

Read more about SCC ad hoc arbitration.

Key differences between institutional and ad hoc arbitration

Procedural framework

The most fundamental difference between institutional and ad hoc arbitration lies in their procedural frameworks. Institutional arbitration operates within pre-established institutional rules that provide a comprehensive procedural framework. In ad hoc arbitration, conversely, parties have the autonomy, but also the responsibility, to manage every aspect of the process. The key advantage of institutional arbitration lies in its system of checks and balances which safeguards the proceedings’ legitimacy and ethical standards.

While institutional rules often allow flexibility on specific issues, the overall structure follows the institution’s established procedures, ensuring consistency and predictability. In contrast, ad hoc arbitration offers greater flexibility, though this advantage requires careful coordination and administrative expertise, which may be difficult to achieve without solid experience in ad hoc arbitrations by all involved parties. This is especially pertinent if one or more parties are uncooperative in the proceedings, or if parties have difficulties reaching agreement in general, a common situation when a dispute has reached the point where arbitration becomes necessary.

The SCC Arbitration Rules are regularly updated to reflect developments in the arbitration industry and users’ needs. As a result, they incorporate useful procedural mechanisms that may not be readily available in ad hoc arbitration, such as emergency arbitration, summary procedure, joinder of parties, consolidation of parallel arbitrations, and multi-contract arbitrations.

Administrative support and case management

There are clear distinctions between the case management and the administrative support available to parties, counsel, and arbitrators in institutional and ad hoc arbitration.

In institutional arbitration, the arbitration institute provides comprehensive administrative support and professional case management services as a core service, with a dedicated team of legal counsel and administrators ensuring efficient proceedings, proper documentation, and adherence to established timelines and procedures. Read more about SCC Platform for case management.

In traditional ad hoc arbitration, the parties and arbitrators must coordinate every aspect of the process, including all administrative work and case management activities. Without careful coordination and administrative expertise, delays and procedural disputes are likely to arise.

For this reason, many parties choose to combine an ad hoc arbitration with professional administrative support from an arbitration institute, such as the SCC, which offers specialized ad hoc arbitration services to ensure smooth proceedings. This hybrid approach is presented at the end of this guide.

Cost structures

Cost structures constitute another distinguishing characteristic between institutional and ad hoc arbitration.

Institutional arbitration typically involves lower administrative costs than ad hoc arbitration, as the arbitration institute manages the administrative work that would otherwise be performed by arbitrators on an hourly fee basis. Institutions such as the SCC that operate under an ad valorem system also offer cost predictability through fixed pricing. The SCC determines costs using a mathematical formula based on the amount in dispute and the complexity of the case. Parties can obtain an indication of potential costs of an SCC arbitration before initiating arbitration proceedings through the SCC Cost Calculator.

Of interest is to the comparison of costs in SCC arbitrations and ad hoc arbitrations is the SCC Report from 2023, Ad hoc vs. Institutional Arbitration in Construction Disputes where the data showed that average cost for a construction arbitration is approximately 40% lower for the parties when they resolve the dispute with a three-member arbitral tribunal under the SCC Rules instead of in an ad hoc arbitration. Even though the average claim in the compared ad hoc arbitrations was significantly lower than the average claim in the comparable SCC arbitrations (EUR 5 million compared to EUR 64 million), the average cost for resolving the dispute in an ad hoc arbitration was significantly higher (EUR 440,000 compared with EUR 262,000).

Selecting and appointing an arbitrator

In general, arbitrator selection differs between institutional and ad hoc arbitration.

In institutional arbitration, the arbitration institute will typically support the parties in the appointment of arbitrators. How the arbitral tribunal is constituted is generally part of its institutional rules. When the institution is involved in the selection of arbitrators, the parties will gain access to the institution’s vast knowledge of suitable and available arbitrators for the dispute.

The SCC Rules include established procedures for arbitrator appointment, challenge, and replacement. This systematic approach reduces potential conflicts between parties over arbitrator appointments while ensuring qualified, impartial, and independent arbitrators. Nevertheless, party autonomy, a cornerstone of arbitration, means that despite the institution’s established procedure for arbitrator appointment, the parties may always choose to appoint the tribunal according to their own preferences, assuming they are in agreement.

In ad hoc arbitration, parties have complete autonomy over the appointment of arbitrator. However, when parties have different preferences, the selection process can become problematic. The parties may request support from an appointing authority if they cannot reach agreement. The SCC’s arbitrator appointment services for ad hoc arbitration provide professional support when parties need assistance selecting qualified arbitrators, ensuring impartial appointments based on relevant expertise and experience.

Quality control and oversight

Quality control and oversight mechanisms represent another difference between institutional and ad hoc arbitration.

Institutional arbitration incorporates quality controls within the rules, including review of formal aspects of awards (such as completeness and compliance with procedural requirements) and procedural oversight. These mechanisms ensure consistent quality and procedural compliance across all cases, while respecting the finality of arbitrators’ decisions on substantive matters.

Ad hoc arbitration relies primarily on party oversight and arbitrator professionalism to maintain quality standards. The lack of systematic external oversight and formal institutional rules may result in inconsistent procedural standards and varying outcomes.

Comparison of the advantages and disadvantages

Advantages of institutional arbitration

Comprehensive administrative support: Institutional arbitration provides comprehensive administrative support, allowing parties to focus on the substantive issues.

Established procedural framework: Institutional arbitration follows the institution’s pre-established rules that are regularly updated to reflect developments in the arbitration industry and users’ needs, ensuring consistency and predictability across cases.

Quality controls: Institutional arbitration incorporates quality controls within the rules ensuring consistent quality and procedural compliance.

Professional case management: Institutional arbitration includes professional case management as a core service.

Lower administrative fees: Institutional arbitration typically results in lower costs, as the institute, not the arbitral tribunal, manages the administrative work. Institutions operating under an ad valorem system also offer cost predictability through a fixed price.

Time to the award: Institutional arbitration typically results in awards being rendered faster than ad hoc arbitration, due to its established procedures that ensure efficient proceedings.

Disadvantages of institutional arbitration

Less flexibility: Institutional arbitration offers flexibility on many issues, but the overall structure is governed by the institution’s pre-established rules. Nevertheless, these rules are regularly updated to adhere to users’ needs and requests.

Advantages of ad hoc arbitration

Maximum flexibility: Ad hoc arbitration offers the cooperative parties flexibility in tailoring every aspect of the process to suit the specific needs of the dispute.

Complete party control: The parties maintain full and joint control over the process and can shape it according to their preferences and the specific characteristics of the dispute.

Disadvantages of ad hoc arbitration

Comprehensive party coordination: The parties and arbitral tribunal must invest significant time and effort in coordinating all aspects of the process, which can be particularly costly and challenging in complex disputes, when parties disagree in relation to the process, or when parties lack arbitration experience.

Potential delays: Complex disputes requiring extensive case management and coordination between multiple parties and arbitrators can, particularly in ad hoc arbitration, lead to delays and additional costs.

Higher administrative costs due to limited support: Ad hoc arbitration will generally result in higher administrative costs due to the lack of comprehensive administrative support provided by an arbitration institute.

Lack of quality control: Ad hoc arbitration relies primarily on party oversight and the professionalism of the tribunal to maintain quality standards, lacking systematic quality

Lack of predictability: All of the above lead to a lack of predictability in terms of costs, procedural aspects, and of the time frame for the duration of the arbitration.

When to choose institutional arbitration

Institutional arbitration is generally recommended for commercial contracts in the following circumstances:

• there may be a need for a cost-efficient dispute resolution method for the contract;
• the potential dispute under the contract involves a value that the parties to the contract are willing to initiate a dispute over;
• the potential dispute under the contract could be complex;
• the parties prefer to keep the contract of the dispute confidential;
• there is a risk that one party may not cooperate with an arbitration procedure;
• there may be a need for administrative support to the parties or the arbitral tribunal during the arbitration;
• the parties have a preference for established and predictable dispute resolution procedures; or
• enforcement of the arbitral award abroad may be likely or necessary, in which case the arbitration institute can provide assistance.

The hybrid approach: ad hoc arbitration with institutional support

In modern arbitration practice, ad hoc arbitration is used less frequently as companies and states increasingly prefer the predictability and systematic approach of institutional arbitration. Nevertheless, ad hoc arbitration is sometimes still used in certain industries or regions by tradition.

Parties who have a contract with a clause referring disputes to ad hoc arbitration may, if they so agree, refer a current dispute to an arbitration institute instead. As long as all parties agree, a change from ad hoc to institutional arbitration is possible.

Parties with such ad hoc arbitration clause may also combine the ad hoc arbitration experience with the professional support of an arbitration institute to ensure a more efficient and cost-effective process. This hybrid model eliminates many, albeit not all, traditional administrative burdens associated with ad hoc arbitration, enabling parties to focus on the substance of their dispute.

SCC’s services for ad hoc arbitrations

The SCC provides professional administrative and technical support to ensure the efficient and fair resolution of ad hoc arbitrations. Parties can maintain the ad hoc nature of the arbitration while benefiting from SCC’s institutional expertise and secure digital platform.

Appointment of arbitrators: When parties cannot agree on the appointment of arbitrators, the SCC can act as an appointing authority, ensuring the selection of qualified and impartial arbitrators tailored to the specifics of the dispute.

Challenges to arbitrators: The SCC can review and decide on challenges to arbitrators in ad hoc arbitration, ensuring the integrity of the ad hoc arbitration process.

Fundholding: Parties to ad hoc arbitrations may deposit funds with SCC, relieving the chairperson of the arbitral tribunal from the responsibility to deposit the funds (the arbitrators’ fees) during the duration of the arbitration.

Digital case management: The SCC’s Ad Hoc Platform is a digital solution designed specifically for ad hoc arbitration proceedings. This secure, user-friendly platform provides parties and arbitrators with all the tools needed to manage ad hoc arbitration cases digitally and efficiently.

Conclusion: making the right choice for your dispute

In the choice between institutional and ad hoc arbitration, the former is preferred in most industries and in most regions. Multiple factors must be considered in making the choice, including the complexity of the dispute, the parties’ arbitration experience and desired level of control of the process, procedural and timeline requirements, the need for administrative support, as well as costs considerations. Nevertheless, the flexibility of the arbitration process that is allowed under an institute’s rules, such as the SCC Rules, combined with the predictability and administrative support, still leads to the conclusion that institutional arbitration at an established institution is superior in modern arbitration.

Ad hoc arbitration increasingly recognises the value of hybrid approaches that combine ad hoc arbitration with the administrative expertise provided by arbitration institutes. The ad hoc arbitration services that the SCC offers allow parties to access the benefits of an institutional backbone while proceeding with the ad hoc approach to arbitration.

Frequently asked questions