The Arbitration (Scotland) Act 2010 (AA 2010) provides a modern statutory framework for domestic and international arbitration in Scotland, drawing on the best features of arbitration regimes around the world and reflected in the founding principles of the AA 2010. One of the principal aims of the AA 2010 is to revive arbitration as a cost-effective and efficient method for resolving disputes in Scotland. Since coming into force in June 2010, there have been some early signs that the AA 2010 is beginning to have an impact. This practice note considers the terms of the AA 2010, including the Scottish Arbitration Rules.
Background and legislative history
Before the enactment of the Arbitration (Scotland) Act 2010 (AA 2010), the law relating to arbitration (www.practicallaw.com/4-107-6426) in Scotland was outdated and unsatisfactory. The foundations of the modern law of arbitration in Scotland were laid down by the judiciary in the 19th century, supplemented by irregular legislation on discrete aspects of arbitration. In the absence of a comprehensive set of rules, the law remained unclear and inaccessible. Matters such as the extent of the arbitrator's powers and the procedures to be adopted were left largely in the hands of the parties.
While this allowed the parties a certain amount of freedom, failure to agree certain basic features would diminish the effectiveness of arbitration as a method of resolving disputes. For example, at common law an arbitrator would have no power to award damages or to order payment of interest on any award. Scottish arbitration law was, therefore, regarded as being unfit for purpose in the modern commercial environment.
Scotland adopted the UNCITRAL Model Law (www.practicallaw.com/7-205-6044) regulating international commercial arbitrations in 1990. The relevant legislation included a provision allowing parties to domestic arbitrations to contract into the application of the Model Law. However, the Model Law was not widely used and the relevant provisions were repealed and replaced by the AA 2010.
In an attempt to address some of the inadequacies in the previous law, a draft Arbitration (Scotland) Bill was initiated in 1997, followed by the Scottish Arbitration Code in 1999, but the newly formed Scottish Parliament lacked the political will to make the modernisation of Scotland's arbitration law a priority.
Arbitration as a method of dispute resolution, therefore, remained in decline. It was perceived as having lost a number of its advantages over litigation, as arbitrations became increasingly protracted, formal and expensive. In the construction industry, the Housing Grants, Construction and Regeneration Act 1996 introduced a statutory right to refer a dispute to adjudication (www.practicallaw.com/3-107-6361), giving parties to a construction contract the opportunity to have their disputes resolved by an industry professional within 28 days. The decline in the use of arbitration was such that in 2005, the Scottish Building Contract Committee removed arbitration as the default method of dispute resolution from its standard form construction contract.
Building on earlier drafts of the Arbitration (Scotland) Bill, and drawing on the key features of the Model Law and the English Arbitration Act 1996 among other codes), the AA 2010 now provides a comprehensive, modern framework addressing the inadequacies in the preceding law. The AA 2010 introduces a number of new rules designed to make arbitration a more effective method of resolving disputes.
As well as reforming the domestic law of arbitration, a further aim of the AA 2010 is to promote Scotland as a centre for international arbitration. The drafters argue that this goal is achievable, given:
- Scotland's neutrality in many international disputes.
- Scotland's geographical location and language.
- The knowledge and experience of Scottish arbitrators and practitioners.
- The comparatively low cost base compared to other jurisdictions.
The AA 2010 received Royal Assent on 5 January 2010 and came into force on 7 June 2010, with the exception of the provisions relating to statutory arbitrations, which are expected to come into force in the course of 2011 (see Legal update, Scottish and Irish Arbitration Acts enter into force (www.practicallaw.com/2-502-4801)). The AA 2010 applies to all arbitration agreements whether made before, on or after 7 June 2010, except:
- Where arbitration proceedings have been raised prior to that date.
- Where, in relation to an arbitration agreement entered into prior to 7 June 2010, parties agree that the AA 2010 should not apply.
Structure of the Act
The AA 2010 has two component parts:
1. The main body of the Act regulates the "external" aspects of arbitration, including
- the seat of the arbitration;
- the enforcement of an arbitral award; and
- the interaction between arbitration and the courts.
2. Schedule 1 includes a set of rules governing the conduct and procedure of the arbitration (including the appointment and powers of the arbitrator) for every arbitration seated in Scotland (Scottish Arbitration Rules (Arbitration Rules)).
The Arbitration Rules are further categorised as:
- Mandatory rules, which cannot be modified or disapplied by the parties.
- Default rules, which apply unless the parties agree to modify or disapply those rules.
Parties to an arbitration agreement must, therefore, consider whether it is in their interests to apply or modify the default rules prior to concluding an agreement to arbitrate.
Section 1 sets out the founding principles of the Act:
- The object of arbitration is to resolve disputes fairly, impartially and without unnecessary delay or expense.
- Parties should be free to agree how to resolve disputes, subject only to such safeguards as are necessary in the public interest.
- The court should not intervene in arbitration except as provided in the Act.
These provisions mirror the opening section of the English Arbitration Act 1996 and reflect the three key elements of the AA 2010, which include:
- Fairness and the efficient determination of the dispute.
- The ability of the parties to influence the procedure and course of the arbitration.
- The limited role of the court in the arbitration.
The AA 2010 must be construed having regard to the founding principles (section 1).
The first principle is given effect through an express duty on the arbitrator or panel of arbitrators (together referred to as the tribunal) to:
- Act independently and impartially, and
- Avoid incurring unnecessary delay and expense.
The Arbitration Rules confer upon the tribunal various procedural tools to ensure that the arbitration is conducted in this manner.
The second principle, party autonomy, reflects the underlying precept that the parties should have the power to decide how the arbitration is to proceed, subject to provisions that are necessary in the public interest. This is reflected in the default provisions in the Arbitration Rules, which apply only insofar as parties do not agree to modify or disapply them.
The third principle is the corollary of the second, reflecting the parties' choice to resolve their dispute by arbitration, rather than litigation. The AA 2010 confers upon the courts an intentionally limited power of intervention (restricted to certain specific matters) with the aim of supporting, rather than overseeing the arbitration.
Scope of the Act
Seat of the arbitration and governing law
The AA 2010 provides that an arbitration is seated in Scotland where the parties or the tribunal designate Scotland as the seat or, failing that, where the court determines that Scotland is the seat (section 3(1)). Parties are free to choose the substantive law to be applied to the dispute, so that disputes under international contracts may be arbitrated in Scotland (section 3(2)). Where parties fail to agree the law applicable to the arbitration agreement, it shall be governed by Scots law (section 6).
Agreements to arbitrate
An arbitration clause in a contract is treated as a distinct agreement (section 5(1), AA 2010). Therefore, an arbitration agreement is separable from a contract of which it forms part, and will not be affected by such contract being declared void, voidable or otherwise unenforceable (section 5(2)). A dispute about the validity of an agreement that provides for arbitration may be arbitrated in accordance with that agreement (section 5(3)).
Suspension of litigation
Where the parties have agreed that their dispute will be resolved by arbitration, the court must sist (stay) any court proceedings on the application of either party (section 10(1), AA 2010). This is subject to any argument that the party applying for suspension of court proceedings has waived its right to insist on arbitration.
Effect of an arbitral award
The tribunal's award is final and binding on the parties (section 11(1), AA 2010). The award is not subject to challenge, save for challenges based on one or more of the following:
- Lack of jurisdiction.
- Breach of natural justice on the part of the tribunal.
- Appeals on errors of law (if the relevant default rule applies).
The award does not bind any third party. An award ordering the rectification or reduction of a document is of no effect insofar as it would adversely affect the interests of any third party acting in good faith (section 11(2)).
Enforcement of an arbitral award
The court may order that a tribunal's award may be enforced as if it were a decree of the court bearing a warrant for execution (section 12(1), AA 2010). The court may not make such an order where:
- The award is the subject of an appeal, or.
- The tribunal is in the process of correcting the award.
Unless agreed otherwise, the tribunal's award may be registered for execution in the Books of Council and Session, provided that the arbitration agreement is itself registered in this way (section 12(5)). This means that the tribunal's award is treated as having equivalent effect to a court decree for payment. This allows the successful party to execute summary diligence (that is, take steps to enforce the award) without the need for further court procedure.
For example, the successful party may immediately seek to arrest (freeze) the moveable assets of the other party (including any bank accounts) if he fails to pay the award within the stipulated time frame. This may be contrasted to an award under the English Arbitration Act 1996, where leave of the court is required as a precursor to enforcement action.
Intervention by the court
The power of the court to interfere in an arbitration is limited to the particular exceptions outlined in the Arbitration Rules. Except as provided in the Arbitration Rules, any legal proceedings in respect of: (a) the tribunal's award; or (b) any other act or omission of the tribunal are incompetent (section 13(1), AA 2010). The question of the tribunal's jurisdiction may be raised only as provided for in the Arbitration Rules or where a party challenges an order for enforcement under section 12 (section 13(3)).
The court has power to grant interdict (injunctions) preventing the arbitration from proceeding where a person who is alleged to be a party to an arbitration agreement questions:
- Whether the alleged arbitration agreement is valid.
- Whether the tribunal is properly constituted.
- What matters have been submitted to arbitration.
For this provision to operate, the person must not take part in the arbitration.
Subject to certain minor exceptions, the AA 2010 and the Arbitration Rules will apply to statutory arbitrations, including, for example, arbitrations under the Agricultural Holdings (Scotland) Act 1991 (section 16). The Arbitration Rules will apply, except to the extent that they are excluded by or inconsistent with any provision under the relevant statute.
New York Convention
The AA 2010 incorporates the relevant text of the New York Convention (www.practicallaw.com/6-205-5196) (sections 18-22).
Scottish Arbitration Rules
The Arbitration Rules set out in Schedule 1 of the AA 2010 apply to every arbitration seated in Scotland (section 7). The Arbitration Rules fall into two categories:
The mandatory rules. These apply in all cases and cannot be modified or disapplied, regardless of any agreement to the contrary (section 8). They provide the basic framework within which the arbitration will take place.
The default rules. These apply to all arbitrations, provided that the parties have not expressly agreed to modify or disapply the rules, either:
- in the arbitration agreement itself; or
- prior to the commencement of the arbitration.
Where the parties agree that a different set of rules are to apply to the arbitration (for example, the UNCITRAL Arbitration Rules (www.practicallaw.com/0-502-7805)), the default rules shall be modified to the extent that they are inconsistent. If the arbitration agreement is silent on the rules to apply to the arbitration, the mandatory and the default rules will apply, thus providing a comprehensive set of rules governing all procedural aspects of the arbitration.
Commencement and constitution of tribunal etc (Part 1)
A party commences an arbitration by giving notice to the other party that he intends to submit a dispute to arbitration in accordance with the arbitration agreement between them. The arbitration agreement will often set out the procedure for the appointment of an arbitrator or arbitrators to determine the dispute. Where the agreement is silent, a default rule provides that the parties must jointly appoint an arbitrator within 28 days of either party requesting the other to do so (Rule 6, Arbitration Rules).
Where the appointment procedure fails, either party may seek the appointment of an arbitrator by an arbitral appointments referee (Rule 7). The Arbitral Appointments Referee (Scotland) Order 2010 (SSI 2010/1996) authorises a number of bodies to act as arbitral appointments referees, including the Chartered Institute of Arbitrators (www.practicallaw.com/8-106-3511).
Notice of a party's intention to seek the appointment of an arbitrator must be communicated to the other party. Provided there is no objection within seven days, the arbitral appointments referee may proceed to appoint an arbitrator to determine the dispute. Either party may apply to the court to appoint an arbitrator where:
- A party objects to the appointment of an arbitrator by an arbitral appointments referee, or.
- A referee fails to make an appointment within 21 days.
The court's decision on the matter is final. When appointing an arbitrator, the referee or the court must have regard to the nature and subject matter of the dispute.
The arbitrator has a duty to disclose any conflict of interest (Rule 8).
Any party to an arbitration has the right to challenge the appointment of a particular arbitrator. A default rule provides that, in the first instance, the tribunal may determine any challenge, although either party may seek the removal of the arbitrator by the court (Rule 10).
The arbitrator will be removed where:
- He is not impartial and independent.
- He does not treat the parties fairly.
- There is a risk of substantial injustice.
Jurisdiction of tribunal (Part 2)
The tribunal has the power to rule on its own jurisdiction, including:
- Whether there is a valid arbitration agreement.
- Whether the tribunal is properly constituted.
- What matters have been submitted to arbitration in accordance with the arbitration agreement.
(Rule 19, Arbitration Rules.)
Rule 19 is designed to limit the scope for interference by the courts and is common to many domestic and international arbitration regimes.
Any party may raise an objection on the ground that the tribunal does not have or has exceeded its jurisdiction in relation to any matter (Rule 20). An objection must be made as soon as reasonably possible. A ruling on the objection may be issued at the time the objection is raised or at the time of the tribunal's award on the merits of the dispute.
Where the tribunal upholds the objection, it must:
- End the arbitration insofar as it relates to the matter outside its jurisdiction.
- Set aside any provisional or part award already made insofar as the award relates to that matter.
A party may appeal the tribunal's decision on any objection within 14 days (Rule 21). A default rule allows any party to apply to the court to determine any jurisdictional issue without first having sought a ruling by the tribunal (Rule 22). This is independent of either party's right to seek an interdict (injunction) in terms of section 14 of the AA 2010, although it would have the same effect.
General duties (Part 3)
Rule 24 of the Arbitration Rules reflects the founding principles of the AA 2010, requiring the tribunal to:
- Act impartially and independently.
- Treat the parties fairly.
- Conduct the arbitration without unnecessary delay and without incurring unnecessary expense.
The first two principles reflect the rules of natural justice that apply to any process involving the determination of a dispute by a third party.
The parties are similarly expressly required to ensure that the arbitration is conducted without unnecessary delay and without incurring unnecessary expense (Rule 25). The Arbitration Rules perhaps go further than the equivalent provision under the English Arbitration Act 1996, which requires the parties (but not the arbitrator) to do "all things necessary for the proper and expeditious conduct of the arbitration".
A default rule provides that disclosure by the tribunal or any party to the arbitration of confidential information relating to the arbitration is actionable as a breach of confidence, save where the disclosure is authorised, expressly or impliedly, by the parties;
- Where it is required to enable the tribunal to conduct the rbitration.
- Where it is in accordance with any rule of law.
- Where it is in the interests of justice.
Arbitral proceedings (Part 4)
A series of default rules (which may be modified or disapplied by the parties) set out the powers of the tribunal in relation to various matters. It is for the tribunal to determine the procedure to be followed in the arbitration as well as the admissibility, relevance, materiality and weight of any evidence (Rule 28, Arbitration Rules).
This power extends to:
- The timing and format of written submissions by the parties.
- The documents to be disclosed to or by any party.
- The scope and nature of any witness evidence.
The tribunal also has wide powers to determine the format and scope of any hearing.
The following further procedural provisions will apply under the AA 2010:
- The tribunal is authorised to issue such directions to the parties as it considers appropriate for the purposes of conducting the arbitration (Rule 31).
- The tribunal may appoint a clerk to assist it in conducting the arbitration, although the parties' consent is required for any appointment in respect of which significant expenses are likely to arise (Rule 32). Historically, arbitrators would typically appoint a solicitor or advocate as a clerk for administrative purposes and to deal with any legal issues that may arise, although it is expected that the role of the legal clerk will be reduced in arbitrations carried out under the AA 2010.
- A party may be represented in arbitration by a lawyer or by any other person (Rule 33).
- The tribunal may obtain an expert opinion on any matter arising in the arbitration, provided that the parties are given a reasonable opportunity to consider and respond to any expert evidence (Rule 34).
- Where any party fails to comply with the deadline for submitting a claim or a defence, the tribunal is given the power to dismiss the claim or to proceed to determine the matter in the absence of a defence (Rule 37).
- Where a party fails to attend a hearing or comply with a direction of the tribunal, the tribunal may proceed with the arbitration on the basis of the evidence before it or may draw an adverse inference from such non-compliance (Rules 38 and 39).
- The parties may agree to consolidate the arbitration with another arbitration (such as parallel proceedings in which the respondent claims an indemnity from another party) or to hold concurrent hearings, although this may not be done on the initiative of the tribunal alone (Rule 40).
Powers of court in relation to arbitral proceedings (Part 5)
A default rule provides that the court may determine any point of Scots law arising in the arbitration on application by any party (Rule 41, Arbitration Rules). This reflects the "stated case" procedure under the previous arbitration law, which allowed either party (subject to any express term in the arbitration agreement to the contrary) to effectively require the arbitrator to refer a question of law to the Inner House of the Court of Session (a bench of at least three judges) at any time. That procedure could easily be used by a party to significantly delay the determination of the dispute by the arbitrator and was almost certainly a contributory factor in the decline in the use of arbitration. Therefore, the Arbitration Rules introduce a number of safeguards to prevent the misuse of the procedure. Parties are also free to decide that the procedure should not apply at all. Parties may decide to dispense with the option of referring a matter of law to the court if, for example, they have confidence in the arbitrator and the sums in dispute do not merit the expense of a reference to the court.
Where the default rule applies, an application for determination of a point of law is valid only if either:
- The parties agree that such an application may be made, or
- The tribunal allows the application to be made and the court is satisfied that there is good reason why the question should be determined by the court.
The rule is, therefore, designed to limit excessive or unwarranted applications. The tribunal may continue with the arbitration pending determination of the application. Unlike the stated case procedure, the decision of a single judge sitting at first instance (the Outer House of the Court of Session) is final and is not subject to an appeal. Unless otherwise specified, all matters referred to the court are determined by a single judge sitting at first instance.
The court also has an important role in supporting the arbitration process. The court may:
- Order any person to attend a hearing for the purposes of giving evidence.
- Require any person, including a person who is not a party to the arbitration, to disclose documents or other material evidence to the tribunal on the same basis as in civil proceedings.
Awards (Part 6)
The tribunal has the power to order payment of a sum of money, including a sum in respect of damages (Rule 48, Arbitration Rules). The tribunal may also order that interest be paid on any sum found to be due (Rule 50). These rules correct two fundamental shortcomings in the previous law under which the arbitrator had no power to award either damages or interest.
A default rule gives the tribunal the power to:
- Make an award of a declaratory nature.
- Order a party to do or to refrain from doing something (powers generally available to the court in an action of specific implement or interdict).
- Order the rectification or reduction of a deed or document.
The parties may also decide that the tribunal has the power to make:
- A provisional award, including payment of a sum of money.
- An order to do or refrain from doing something on an interim basis.
The tribunal may make more than one award at different times and on different aspects of the dispute (for example in relation to any preliminary issue) (Rule 54).
Rule 58 introduces a slip rule, allowing the tribunal to:
- Correct a clerical, typographical or other error.
- Clarify or to remove any ambiguity in the award.
This mirrors the English approach. Such an amendment can be made at the initiative of the tribunal or on application by any party, provided that the application is made within 28 days of the award.
The previous practice in Scotland was for an arbitrator to issue an award in draft, so that the parties would have the chance to comment on the award or seek the correction of any errors prior to the award being made final. The option to issue an award in draft is retained by a default rule (Rule 55).
Arbitration expenses (Part 7)
The parties are severally liable for the tribunal's fees and expenses, including the expenses of any clerk or expert appointed by the tribunal (Rule 60, Arbitration Rules). The arbitrator's fees may be charged at a reasonable commercial rate. In the first instance, the parties are liable for an equal share of the tribunal's fees and expenses.
A default rule allows the tribunal to make an award allocating the parties' liability between themselves for any recoverable arbitration expenses. This includes the arbitrator's fees and expenses, as well as the legal expenses of the other party to the arbitration (Rule 62). In making an award of expenses, the tribunal is expressly required to have regard to the normal rule that expenses should follow success, except where this is inappropriate in the circumstances. Similar to a court, the tribunal may order a party to provide security for expenses (Rule 64).
Challenging awards (Part 8)
As set out above, a party may only apply to the court to review any decision of the tribunal in certain limited circumstances, which are:
- A lack of substantive jurisdiction.
- Serious irregularity.
- Appeal on a point of law.
(See Effect of an arbitral award.)
The first two grounds are mandatory, while the right to appeal on a point of law can be modified or disapplied by the parties.
Substantive jurisdiction (Rule 67)
While the tribunal has the power to rule on its own jurisdiction, that power is subject to review by the court. The court may confirm, vary or set aside the decision of the tribunal.
Serious irregularity (Rule 68)
Serious irregularity includes any irregularity which has caused or will cause substantial injustice to the appellant, including:
- Failure to conduct the arbitration in accordance with the arbitration agreement or the Arbitration Rules.
- Failure of the tribunal to deal with all the issues submitted to it.
- An arbitrator not being impartial or independent.
- An arbitrator not having treated the parties fairly.
Legal error (appeal on point of law) (Rule 69)
A party may appeal against the tribunal's award on the grounds that the tribunal erred on a point of law. An appeal may only be made by agreement between the parties or with the leave of the court. The court will only grant leave to appeal where either:
- The point at issue substantially affects the parties' rights and the tribunal's decision on the point was obviously wrong.
- The court considers the point to be of general importance.
(Rule 70, Arbitration Rules.)
Applications to the court are heard by a single judge sitting in the Outer House of the Court of Session. A party may appeal that decision to the Inner House, although leave of the Outer House is required. Leave will only be granted in circumstances where:
- The court considers that the proposed appeal raises an important point of principle or practice.
- There is another compelling reason for the Inner House to consider the appeal.
The decision of the Outer House on whether to grant leave is final. The decision of the Inner House on the appeal is final, with no further right of appeal to the Supreme Court.
Appeals are competent only where a party has exhausted all available rights of challenge or appeal in the arbitral process (Rule 71). An appeal must be made within 28 days of the date of the award (including any provisional or partial award). It is likely that this provision will be interpreted as a strict time bar. The tribunal may proceed with the arbitration while the appeal is being decided. Where the court orders the tribunal to reconsider its award, the tribunal must make a new award within three months (Rule 72).
Miscellaneous (Part 9)
The final part of the AA 2010 contains a number of miscellaneous provisions for the good administration of the arbitration, including:
- The procedure and time scales for submitting any objection permitted under the Arbitration Rules (such as in relation to the tribunal's jurisdiction or any other irregularity) (Rule 76).
- The requirements for service of formal communications (Rule 83).
- The method for calculating periods of time (Rule 84).
Rule 73 confers immunity, save in the case of bad faith, on the tribunal in respect of acts and omissions in the performance of its functions. Rule 74 confers similar immunity upon the arbitral appointments referee.
Comparisons with English Arbitration Act 1996
The AA 2010 shares a number of common features with the English Arbitration Act 1996. Both jurisdictions share the fundamental principles of fairness, party autonomy and limited court intervention, which are reflected throughout provisions of the AA 2010 and the Arbitration Rules.
Concepts such as separability of arbitration agreements, consolidation of arbitral proceedings and the correction of errors by the introduction of a slip rule reflect similar provisions in England, as well as in other jurisdictions. The procedures for challenging the jurisdiction of the tribunal and the process for challenging awards also broadly follow the position in England.
The AA 2010 also contains a number of provisions improving on or filling in perceived blanks in the English model. In particular:
- There is an express and detailed confidentiality provision as a default rule, rather than relying on the common law, as in England.
- The AA 2010 covers oral agreements to arbitrate, which again are governed by the common law in England.
- The AA 2010 also resolves the difficulty in England as to which law applies to the arbitration agreement by providing that, where Scotland is the seat of the arbitration, Scots law will apply unless otherwise stated.
Finally, sections 32 and 33 of the AA 2010 provide that the Scottish Ministers may, by order, make any supplementary or incidental provision which they consider appropriate in order to give full effect to the AA 2010. This allows the Scottish Ministers to react quickly to rectify any minor problems or loopholes in the primary legislation.