The renaissance of Scottish arbitration

“International arbitration is a specially established mechanism for the final and binding determination of disputes, concerning a contractual or other relationship with an international element, by independent arbitrators, in accordance with procedures, structures and substantive legal and non-legal standards chosen directly or indirectly by the parties.” (Julian D M Lew/Loukas A Mistelis and Stefan M Kroll, Comparative International Arbitration, Kluwer Law International (2003), para 1-1.)

The Arbitration (Scotland) Act 2010 ("the Act") commenced on 7 June and represents a new beginning for Scottish domestic and, more interestingly, international arbitration. Many critics of the Act asked, why do we need it? Litigation works fine; adjudication is a success; mediation is the future, and so on. But these critics have missed a trick. They have missed the bigger picture and the big opportunities that this Act can bring to Scotland and Scottish practitioners.

The world is a global marketplace as never before. Legal individuals contract with others across the globe. The rules of doing business and resolving disputes vary dramatically across the world and are quite different to what we are used to in the cosy, well ordered and organised West. How different other parts of the world, where corruption reigns supreme and corrupt local courts, together with a lack of well developed jurisprudence, make sensible local litigation an almost impossibility. Geopolitical and other risks which impact directly on investment need to be controlled and managed. With increasing globalisation comes the absolute necessity of how best to protect a transnational investment. Parties attempt to protect their investment by international arbitration, and in doing so need the services of good quality arbitrators and lawyers.

There is no reason why these arbitrators and lawyers should not be Scottish. In fact, there are many reasons why they should be.

It is always easier to be involved in a dispute with a Scottish connection where we already act for a Scottish client. However, the new Act creates a catalyst for two new major opportunities. First, Scotland can become a forum of choice where foreign parties can bring their arbitrations for resolution. Secondly, Scottish arbitrators and Scottish lawyers can work on foreign arbitrations, whether as decision maker or counsel, in other exotic countries with no connection to Scotland. Why? It's simple – Scottish legal services are of high quality and excellent value, which presents us with a significant competitive edge in the international marketplace. The Act is the main platform which will allow Scotland and Scottish practitioners to take their place at the international arbitration table and to compete seriously for a slice of international arbitration pie.

Scottish arbitration – a new beginning

The Act brings Scottish domestic and international arbitration up to date and Scotland will now benefit from having all of Scottish domestic and international arbitration law in one accessible and user friendly piece of legislation. The Act is consistent with the UNCITRAL Model Law and also compliant with the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958. This is fundamental to the Act’s success.

Parties from abroad now have the choice to resolve their differences more quickly and more cost effectively than by litigation or arbitrating elsewhere. Parties can choose where and how to resolve their transnational disputes. They can take the dispute out of the country where the dispute has arisen and resolve it in a neutral third country (e.g. Scotland), and by doing so protect their investment.

The key element which makes international arbitration so popular is that it is supported by an international legal framework. Parties benefit from a judgment – termed an award – that is generally more effective and enforceable than a judgment of a national court, thanks to the New York Convention which has now been ratified in 144 countries. The New York Convention provides for mutual recognition and enforcement between signatories, and also has very limited grounds for refusal (repeated in the Scottish Act at s 18(2) and (3)). Whilst litigation can be quick and effective, this tends to depend on where you choose to litigate and, importantly, where you intend to enforce your decree or judgment. If there is no reciprocal agreement, treaty or convention between the UK and the country where enforcement of the judgment is sought, this can be fatal to a quick and effective enforcement.

Parties also benefit from a process which is private and (hopefully) confidential, with flexibility and autonomy of procedure, and limited discovery/disclosure, which should and can be more cost effective and quicker than litigation. In my experience, the average arbitration normally lasts from one to three years from start to finish, with the average hearing from one to five days. Of course, some will be quicker and some will be longer. This compares well to litigation, especially when one considers the risk of multiple appeals following any first instance judgment. In addition, in my experience, most parties involved in arbitration tend to comply with the award.

The success of international arbitration is also dependent on the interaction between a variety of laws and rules, which at first glance appear complicated, but are actually quite straightforward. These include the arbitration law of the ”seat” of arbitration, the procedural law of the arbitration (the ”lex arbitri”), the governing law of the arbitration clause, the governing law of the contract, and the arbitration rules agreed upon by the parties (if any), such as UNCITRAL rules, ICC, LCIA, SCC etc.

So for example, you could have a dispute between a French and a Nigerian company and an arbitration agreement which provides for ICC arbitration in Edinburgh with a Swiss governing law of the contract. Therefore, the procedural law of the arbitration is found in the law of the seat, the Scottish Act. The ICC rules regulate the procedure of the arbitration and contract out of some/all of the default rules contained within the Scottish Act; and Swiss law applies to the rights, obligations and remedies of the parties under the contract.

The price of success

Arbitration is big business, often an expensive one and often quality at a price. This statistical reality could be Scotland’s competitive edge, as the majority of international clients are in search of quality and value. This is true even more in tough economic times.

According to a survey conducted by Klaus Sachs in 2006 (article "Time and Money": Pervasive Problems In International Arbitration (L Mistelis and D M Lew (eds) (2006), 103-115), approximately 85% of the costs ("expenses" in Scotland) involved in arbitration relate to legal fees, with the remaining 15% relating to arbitrator costs and administrative expenses of any institution. Mr Sachs conducted a survey of ICC disputes ranging from US$218 million to US$12 million, where he also noted legal fees ranged from US$4.2 million to US$1.8 million.

Arbitrating using English or US lawyers is on any view prohibitive – again from the writer's experience in practice. With the cost of leading London QCs and partners in the magic circle firms at approximately £1,000 per hour, costs rise quickly on any dispute. In comparison, Scotland has the same high quality at a fraction of the cost, with QCs and partners in the leading Scottish firms perhaps around 30% of this figure at best – and even less for junior counsel might I add! International arbitrators are quite cheap in comparison, with average hourly rates ranging from £150-£450. I should also say that the trend in international arbitration (depending on the agreement of the parties or its absence), for disputes in excess of US$10 million, is for a tribunal consisting of three arbitrators. This may well cause delay and will cause additional cost (in fact three times the cost!), but the attraction is mainly on the basis (mistaken or otherwise) that three heads are generally better than one. However, this trend allows the arbitrators on any given tribunal to be an advantageous legal and non-legal mix, depending on the dispute.

How can Scotland think big?

Well, so far so good. All this sounds great, I hear you say, but how can Scotland really secure a real slice of arbitration pie? In my view, there are four things we need to do:

1. We need to change our arbitral pleadings and procedure

If you can plead in Scotland, you can plead anywhere! Scottish court practice and procedure is precise, logical and traditional. The procedure adopted in domestic (and perhaps also in some of the few international arbitrations there have been in Scotland) tends to be a reflection of the standard way we plead and draft our pleadings and appear in court. This is not a criticism, just a fact, as we are all products of our home jurisdiction. We have a summons or writ and a defence, all with pleas-in-law and a generous sprinkling of Latin, lengthy adjustment periods in which to work up these pleadings, followed by the amalgam known as the closed record, followed by amendment and legal debates on those pleadings, and so on and on. We also have lengthy examination in chief (except in the Commercial Court in the Court of Session), as opposed to witness statements which is the norm in international arbitration.

Why should Scots arbitration continue to adopt the practice and procedure of the courts? To adopt the best parts makes sense, but to adopt the worst as well does not. This in itself has been the cause of extreme delay and overcomplexity of the arbitral process. This has to change if we don’t want our past to infect our future. We have to embrace modern and internationally recognised methods of pleading in international arbitration and dispense with traditional Scots pleadings, technical pleading points and with oral examination in chief.

2. We need to rebalance the arbitrator pool

The majority of arbitrators in international arbitration are lawyers and we need to embrace this reality. This is not to say that non-legal arbitrators, such as surveyors or engineers are a bad thing: far from it, they can be perfect arbitrators on the right arbitration, and indispensable components on three-arbitrator tribunals. However, the legacy of old Scots arbitration is that Scottish arbitrators have historically been non-lawyers, and as we move forward to a new beginning, we need to ensure that the quality of Scots arbitral justice is just as high as that of our courts. We can achieve this goal by having a pool of well trained and able commercial lawyer arbitrators, with the assistance of institutions such as the Faculty of Advocates and Law Society of Scotland, who can hopefully establish their own arbitrator panels as well as becoming arbitral appointments referees under the Act.

3. We need to recognise our quality, value, neutrality and convenience

We have a lot to offer and we need to remember that. Scotland benefits from having a high quality legal system, complemented by high quality lawyers at a cost effective price. This results in Scotland being one of the world's best forums of choice in which to arbitrate. The fact that Scotland is geographically located in Western Europe, is relatively easy to get to, has its own international and independent brand which is separate and distinct from the rest of the UK, and is English speaking (which is the language of international business), all means that there is great potential for Scotland to position itself as a leading arbitration venue of choice. In addition, there is great whisky and golf as an alluring fringe benefit!

It also means that Scottish lawyers can make good quality and highly cost-effective counsel in international arbitrations in other jurisdictions. This is work we can and should be competing for, as our quality and value is a significant competitive edge in the international arbitration marketplace. Whether you come to us or we come to you, we have, on any view, a lot to offer.

4. We need to spread the word

The Act will not in itself result in a renaissance of Scottish international arbitration. Our product is great, we have a huge competitive edge, but there is no point in keeping all of this to ourselves – we need to spread the word.

Consumers of arbitration around the world need to know that Scotland has a new Act which is Model Law and New York Convention compliant. They need to know that arbitrations conducted in Scotland will be conducted with greater speed and at lower cost than elsewhere. They need to know that we have a supply of well trained and able commercial arbitrators. They need to know that the Scottish courts (and the judges who supervise the arbitral process), together with the advocates and solicitors, are of high quality and good value. They need to know that Scots lawyers are international lawyers, export well, are of excellent quality and value, and are the ideal counsel of choice in arbitrations abroad.

The creation of a Scottish Centre for International Arbitration could prove to be a useful tool and a focused ambassadorial platform from which to boost the Scottish international arbitration brand, and spread the word of quality, value and our capability to service arbitrations both at home and abroad. We are greater than the sum of our parts and a combined and collective approach will produce rewards. I would like to take this opportunity to publicly encourage the joint organisers of this conference to seize this initiative

Renaissance

If we do all these things, if we think big, if we all work together, there really can be a new beginning and a renaissance for Scottish arbitration at home and abroad. If we put our minds to it, we really can have a big slice of arbitration pie.