Legal Briefing

Scottish arbitration

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Scotland | 01 April 2010

The Arbitration (Scotland) Act 2010 (the 2010 Act) was passed by the Scottish parliament on 18 November 2009 and will come into effect later this year (the latest estimates are for June 2010). What changes does it introduce and what impact will it have on dispute resolution in Scotland?

Historical Position

Arbitration is not used widely in Scotland. It is seen as slow, uncertain and expensive. In an economic climate where companies are acutely aware of the need to maintain cash flow and achieve speedy resolutions to disputes, this is unattractive. Arbitration has had to compete with adjudication, which is capable of addressing most construction disputes within a 28-day period, providing procedural certainty and (relatively) predictable costs. In recent years the Commercial Court in the Court of Session, Scotland’s highest court, has been successfully pushing cases towards resolution through active case management and introducing procedural flexibility. Some Sheriff Courts (Glasgow in particular) have applied similar principles to actions raised there, reducing the time to resolve the case and the costs. Why then would anyone choose arbitration unless they had accidentally selected it as the default method of dispute resolution on a standard form contract?

Part of the problem has been that arbitration in Scotland was based on a combination of old case law (some dating back to the 13th century) and piecemeal statutes (from 1598). Some of the acknowledged shortcomings of the system were:

  1. The lack of an inherent power for the arbiter to award damages, expenses or interest.
  2. The arbiters could not determine their own jurisdiction.
  3. Uncertainty regarding whether a case could be kept confidential.
  4. Uncertainty as to whether the court rules of evidence applied.
  5. There was nothing stopping a party from being appointed as a sole arbiter.
  6. The stated case procedure for referring points of law to the courts was complex, cumbersome and ultimately a useful delaying tactic for a party seeking to drag out the process.
  7. Uncertainty as to whether an arbiter had immunity from being sued by a party.

Another deterrent is the fact that parties pay the arbiter by the hour, which, over the span of a traditional arbitration, could be expensive. For these reasons arbitration was not widely employed and had fallen out of favour. The Joint Contracts Tribunal Ltd produces the most widely used standard form of construction contract in the UK. In 2005 it dropped arbitration as the dispute resolution forum of choice from its suite of contracts.

What Changes Will the 2010 act Introduce?

The 2010 Act starts by setting out its founding principles:

  1. resolving disputes fairly, impartially and without unnecessary expense or delay;
  2. allowing parties to resolve disputes in whatever way they agree, subject to certain safeguards in the public interest; and
  3. courts not intervening in an arbitration beyond the extent that the 2010 Act permits.

One of the main aims of the 2010 Act is to make Scotland a seat of international arbitration by bringing the legislation into line with other jurisdictions, while improving on what are seen as deficiencies in those jurisdictions. For example, one such shortcoming is that arbitrators do not have an implied power to decide their own jurisdiction, which can lead to lengthy legal challenges. The 2010 Act addresses this, providing greater procedural certainty.

The 2010 Act also contains similar provisions to the Arbitration Act 1996, which applies in the rest of the UK. This provides obvious benefits to clients who operate throughout the UK, as they can incorporate a common set of arbitration rules into their standard terms and conditions, giving greater certainty to their business transactions. The 2010 Act has dropped the traditional term ‘arbiter’ and replaced it with the more modern term ‘arbitrator’, which again is consistent across the UK.

The default position is that arbitration proceedings will be confidential, following the position in England. This is one of the attractions of arbitration. The 2010 Act requires that arbitrators be independent and impartial. Arbitrators are under an explicit disclosure requirement in relation to conflicts of interest, whether they have been actually appointed or only potentially appointed in an arbitration. This is intended to ensure that all parties understand the importance of the arbitrator’s independence.

Where the appointment process for an arbitrator fails, an arbitral appointment referee (AAR) can resolve the problem without the need for costly reference to the courts. These are recognised bodies (similar to a nominating body in adjudication) and the Chartered Institute of Arbiters has outlined its intention to be appointed as an AAR.

The 2010 Act applies to all domestic arbitrations and international arbitrations where Scotland is the ‘juridical seat’, whether the arbitration agreement is written or oral. It applies a set of mandatory rules to all arbitrations that cannot be contracted out of. In addition there are default rules that can be disapplied by agreement. The default rules are designed to prompt the parties to consider the rules and procedures that will apply to their arbitration. For example:

  1. Whether the court will have any role in determining the arbitrator’s jurisdiction?
  2. What powers will the tribunal have if a party unnecessarily delays in submitting its pleadings?
  3. Will the court have the power to make a provisional award?
  4. Would the parties be able to appeal against an arbitrator’s award on the grounds that the arbitrator made an error on a point of Scots law?
  5. Will the arbitrator have the power to order a claimant to provide security for the recoverable arbitration expense of the other party?
  6. Can the arbitrator consolidate more than one dispute in an arbitration or hold concurrent hearings?

The Scottish ministers have the power by order to amend and update the 2010 Act so that the process can be developed quickly.

Role of the Court

In accordance with the founding principles, only restricted references can be made to the courts. Under the previous system the stated case procedure allowed the parties to refer a point of law to the Court of Session at any time during the arbitration. As stated above, this was blamed for many of the delays that were inherent in the arbitration process.

The new system provides three ways to challenge an arbitral award (ie after it has been made). These are:

  1. A challenge to the substantive jurisdiction of the tribunal. This is based either on the lack of a relevant arbitration agreement; that the arbitrator was not properly appointed; or that the dispute lies outside the scope of the arbitration agreement.
  2. A serious irregularity challenge where the ‘irregularity’ results in a substantial injustice to one of the parties. This is designed to challenge how an arbitrator came to a decision.
  3. A legal error appeal where a party considers that the arbitrator has made an error on a point of Scots law. Parties can disapply a challenge of this nature in their arbitration agreement.

Appeals from the Outer House of the Court of Session are limited and there is no right of appeal to the Supreme Court. This reduces the scope for challenges to arbitrators’ decisions, giving the process greater credibility.

International Enforcement

The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 requires contracting states to recognise and enforce arbitration awards made in other convention states. Much of the arbitration traffic in London arises from works undertaken beyond the UK, as companies recognise the certainty and quality of arbitration decisions made in that jurisdiction, combined with the knowledge that the decision will be enforceable in other jurisdictions.

impact on dispute resolution in Scotland

It must be remembered that although arbitration is perhaps best known for resolving disputes in the construction industry, it has been and can be used in any sector.

The Minister for Enterprise, Energy and Tourism in the Scottish government recently stated that the 2010 Act:

‘Provides Scottish arbitrators with a once-in-a-lifetime chance to promote arbitration in Scotland as a method of dispute resolution that is flexible, confidential, quicker and thus cheaper than litigation. It is for potential arbitrators – whether members of one of the professions or none – to seek to exploit this opportunity… We also hope that many trades, professions and industries will create low-cost consumer arbitration schemes to emulate the schemes operated by the Association of British Travel Agents, the Scottish motor trade and the Institute of Chartered Accountants in Scotland.’

The Scottish ministers consider that the reasons why parties may be attracted to Scotland include:

  1. It is estimated to cost only 40% of similar arbitration in London or New York.
  2. Scotland may be a more acceptable forum for international companies in dispute with English firms.
  3. Scotland has a mature legal system to back up arbitration.

There is no doubt that the 2010 Act provides a major improvement to the arbitration process. There is also a political will to create an environment where international arbitrations will come to Scotland.

Scottish companies contracting outside the UK should consider applying the laws of Scotland to their contracts and specifying Scottish arbitration as the preferred method of dispute resolution to achieve this aim. There can also be a tactical advantage to be gained, when contracting with a foreign company, by specifying (what is to them) a foreign jurisdiction. The costs and perceived difficulties in raising proceedings in a foreign jurisdiction may act as a deterrent to bringing low-value or speculative claims.

It is arguable whether arbitration in an unamended form will have any impact in a domestic context, especially in the construction sector. Adjudication is unsuitable for low-value cases because of the irrecoverable expense involved. It can also be unsuitable for high-value complex disputes because adjudicators are not given enough time to consider the dispute properly. Parties often address this by agreeing to extend the time for the adjudicator to make a decision. Despite being acknowledged as a ‘blunt instrument’ most adjudication decisions are nevertheless enforced. Other industries, such as the IT sector, are considering adopting their own adjudication process, as it is generally acknowledged as providing an effective resolution to disputes.

A significant benefit of arbitration is that the dispute is being considered by a person of skill. However, the Commercial Courts now have dedicated judges who generally provide good-quality judgments. The Commercial Courts, though, have at times become too busy and it can be difficult to get court time, especially in the Court of Session.

Conclusion

It will be difficult to attract international arbitration away from London but Scottish companies can start this process by amending their terms and conditions, when contracting overseas, to provide for Scottish arbitration.

In a domestic context the world has moved on since arbitration was last popular, and if it is to be successful again arbitrators need to find a way to offer solutions that address the shortcomings of adjudication and litigation. Arbitrators will have to compete on time and cost with adjudication and modern litigation before solicitors will recommend it to their clients. They also need to consider ways to offer aggressive case management to reduce the length of the process. This can be achieved by, for example, adopting the Chartered Institute of Arbitrators’ Scottish Arbitration Code 2007, which offers a six-month arbitration process.

As regards costs, this is more problematic and arbitrators should consider fixed or capped fees so that costs are proportionate to the sums in dispute.

Arbitration has addressed the existing problems with procedural certainty, but it must now be presented as a cost-effective package in terms of time and money to become an attractive option for solicitors and clients. As the Scottish ministers said, it is for potential arbitrators to seek to exploit this opportunity. It remains to be seen whether they will rise to the occasion.