Simple steps

Arbitration has a long history in Scotland as a method of resolving disputes. An Act of the old Scots Parliament in 1427 separated arbitration in the burghs from other secular and ecclesiastical, arbitration, but it was apparently well established as a method of dispute resolution as far back as the early 13th century.

In the 19th and 20th centuries, arbitration was for some time considered to be the method of dispute resolution of choice in the business world. The advantages of arbitration then were virtually the same as they are now:

• parties to a dispute can choose a person as their arbitrator who has special expertise or knowledge of the subject-matter of the dispute; arbitral proceedings are usually confidential, which may be important for reasons of commercial sensitivity;
• arbitration can provide flexible procedures to a greater extent within the parties’ control, with location, timing and other arrangements planned to suit their particular needs – they are not tied to strict court processes;
• the arbitrator’s decision or award is final and binding without further court hearing of the issues and may be enforced like a court decree;
• within countries which have ratified the New York Convention on the recognition and enforcement of foreign arbitral awards, agreements to arbitrate and so awards made in other countries will be recognised without further review of the issues, offering major advantages to those engaged in international or cross-border trade.

In recent years, however, usage of arbitration in Scotland has declined as a method of dispute resolution, partly as a result of the success of the use of adjudication under the Housing Grants, Construction and Regeneration Act 1996 in the construction field, but also because of the state of arbitration law. Domestic Scots arbitration law derives primarily from case law and has not been codified into statute. The law is often not clear or readily accessible and it does not reflect modern practice on arbitration.

Scotland is one of only a few developed nations that lacks a comprehensive statutory basis for its arbitration law. As a result of gaps in the law, difficulties in establishing exactly what the law is, particularly compared to other jurisdictions where it has been codified, and the stated case procedure allowing the courts to intervene, Scotland is not considered an attractive venue within which to conduct arbitration.

Underpinning growth

The key priority for the Scottish Government is to develop and enhance sustainable economic growth in order to generate wealth and prosperity in Scotland. Any country with thriving economic activity, or aspirations to increase its economic activity, also requires efficient, affordable and just systems for dispute resolution. Disputes in the commercial world are inevitable, just as in other areas of life. Commercial entities may trade and transact with each other to their mutual benefit and profit, sometimes for many years, before some incident or change of circumstances causes them to disagree.

In the interests of continuing and increasing economic growth, it is imperative that methods are available to those parties which facilitate the speedy, effective and just resolution of those disputes at a cost which is economically viable.

For that reason the Government has brought forward a bill to reform and modernise arbitration law in Scotland. The new bill will put the majority of the general Scots law of arbitration into a single statute. It will replace the existing statutory provisions relative to arbitration in Scotland and restate, codify and aim to improve the existing law, both common law and statutory. In future anyone in Scotland, or seeking to do business in Scotland, should be able to access relatively easily the principles and rules governing the law of arbitration in Scotland in language which can be readily understood. This will bring Scotland into line with the rest of Western Europe and the major commercial countries of the rest of the world.

Default code

The primary objectives of the bill are that it should:

• clarify and consolidate Scottish arbitration law, filling in gaps where these exist;
• provide a statutory framework for arbitrations which will operate in the absence of agreement to the contrary (though some elements will be mandatory, as with the UK Arbitration Act 1996);
• ensure fairness and impartiality in the process; and minimise expense and ensure that the process is efficient.

The approach to arbitration taken in the bill will aim to be consistent with that in the rest of the UK where that is appropriate. We intend that the same rules should apply in principle to domestic, cross-border (with other parts of the UK) and international arbitrations which are based in Scotland.

While parties will remain free to use the United Nations Commission on International Trade Law (UNCITRAL) Model Law on international commercial arbitration where the new regime allows, as in the rest of the UK it will no longer be the default code for those arbitrations under Scots law. The UNCITRAL Model Law is a framework of law designed to promote arbitration in countries where it has not much been used, but it has not attracted much international commercial arbitration business to Scotland.

The Model Law is incomplete and contains crucial gaps: for example, there are no powers for the arbitrator to award damages, expenses or interest. It does not provide a comprehensive arbitration regime and has to be supplemented by domestic law. The bill, which (like the UK Arbitration Act 1996) is based on Model Law principles, will, however, provide an effective, comprehensive and modern framework for arbitration in Scotland.

Reform or die

We hope that the bill – once enacted – will encourage the use of arbitration domestically and that it will attract international arbitration business to Scotland. We also hope that it may encourage industries and professions to set up their own low cost arbitration schemes, such as that operated by the Association of British Travel Agents and the Scottish Motor Trade Association, so that consumers in dispute with such bodies are not faced with the stress and expense associated with raising an action in court. The pressure on the courts may be lessened if the takeup of arbitration increases markedly.

We cannot of course guarantee that simply reforming the law on arbitration in Scotland will have the effect of increasing the use of arbitration domestically or attracting international arbitration business to Scotland. To a very large extent that is up to arbitration practitioners and those who see benefits in using arbitration as a method of commercial dispute resolution. But what I can say with some certainty is that if we do not reform and modernise the law then arbitration in Scotland may wither and die out, at a time when usage of arbitration in other parts of the world is increasing, and in some parts of the world dramatically so. The Government is therefore playing its part by bringing forward proposals for reform and modernisation.