Arbitration: the way forward in disputes?

If there is a range of dispute resolution processes to choose from, in what circumstances might arbitration be the choice of parties? In this connection I consider only commercial situations.

It is in the nature of commercial dealings that, while they often may run smoothly, they have the potential for disputes to arise. It may be prudent for parties in their contractual arrangements to make provision for how any such dispute is to be resolved. The candidate of choice may often be arbitration.

The most obvious advantage is the very fact that it is a choice: parties are at one about the form of process rather than being exposed, for example, to litigation in a forum which may be to the disadvantage of one or other or both of them. The choice will also include the selection of a mutually acceptable arbitrator or arbitrators, or of a mutually acceptable mode of identifying such an arbitrator or arbitrators – through, for example, an established arbitral institution.

Arbitration v litigation

Because arbitration is, in many respects, close in nature to proceedings in a court of law, parties can expect that their dispute will be addressed and resolved in a judicial manner – an absence of bias, attention given to evidence and/or submissions placed before the arbitrator by the parties, and determination of the dispute, according to the arbitrator’s honest and best judgment, in accordance with the parties’ legal rights and obligations.

Arbitration is also a private process, so the confidential nature of trade secrets, or even that the parties are in dispute, can be respected. That confidentiality, if it is important, cannot ordinarily be assured in a court of law, which is essentially a public forum. On the other hand, there may be an element of choice for commercial parties who are considering litigation. In some jurisdictions, specialist judges are allocated to deal with commercial disputes; those judges will commonly have been commercial law practitioners at some stage in their careers and, as such, and later as commercial judges, have built up experience and expertise in that field. The Court of Session (Scotland’s supreme civil court) has a dedicated group of commercial judges who have built up a good reputation. The Commercial Court in London has a similar reputation.

Litigation has the obvious advantage that decrees of the court are enforceable by mechanisms (in Scotland, diligence), which are readily to hand and effective in their own jurisdictions. Decrees pronounced in EU countries should also be readily enforceable in other EU states. The position may be less satisfactory in other states. Arbitrators cannot enforce their own awards, but there are procedures that allow national courts to lend their assistance to the enforcement of arbitral awards. For example, s 12 of the Arbitration (Scotland) Act 2010 makes provision for such enforcement, whether or not the arbitration concerned was seated in Scotland (s 12(6)).

The Act also expressly recognises and, subject to s 20, makes enforceable in Scotland awards to which the New York Convention applies (s 19). That Convention, the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958), is an instrument to which most countries, including the United Kingdom, are signatories. It provides for the recognition and enforcement in signatory states of arbitral awards made in other such states; it is of major significance in the enforcement of awards in international commercial arbitration. In some situations, an arbitral award may be more readily enforceable in a foreign country than a court judgment from abroad. Arbitration may also offer procedural flexibility, being capable of meeting the particular needs of the parties; in court procedures, generally applicable rules of court will ordinarily apply. Also, in arbitration, the parties will be able to choose for themselves, if appropriate, an established set of procedural rules. Arbitration is not subject to rules about rights of audience such as ordinarily apply in national courts.

Commercial parties are likely to be sensitive to the cost of proceedings. In arbitration, the parties will be responsible not only for the costs of their representation, but also for the fees and charges of the arbitrator (or arbitrators), of any necessary support services (such as a clerk and for hearings accommodation), and of any arbitral institution through whose offices the arbitration has been established. These costs may be substantial, particularly in international commercial arbitrations, though there is reason to believe that they will be significantly lower in Scotland than in some other jurisdictions, such as England & Wales.

Commercial parties are also likely to be sensitive to how expeditiously their dispute can be resolved. Arbitrations have not always been expeditious. Much may depend on the personal authority of the arbitrator or arbitrators to progress matters.

How challengeable?

Because parties to an arbitration have agreed that the arbitrator’s award will be binding upon them, that award will be final unless the relevant national law allows for a challenge to it. In Scotland, the position at common law was that the award of an arbitrator (then called an arbiter) was final on matters both of fact and of law (Caledonian Railway Co v Turcan (1898) 25 R (HL) 7, per Lord Watson at 17); only misconduct or excess of jurisdiction could open the award to review by a court of law.

However, s 3 of the Administration of Justice (Scotland) Act 1972 provided that, during the course of an arbitration, an arbiter might, and in some circumstances must, state a case for the opinion of the Court of Session on a question of law arising in the arbitration. This provision was less than satisfactory in practice. Some arbiters, in my experience, were reluctant to be proactive and decisive, particularly in procedural matters, out of an apprehension that their decisions would be challenged in court under this procedure.
On that matter, Lord President Hope had this to say in ERDC Construction Ltd v HM Love & Co (No 2) 1997 SLT 175 at 178: “I consider that it would be an abuse of s 3 of the 1972 Act for questions of mere procedure to be brought before the court for its opinion on the pretext that they raise questions of law. The delay and expense of a stated case is an obstacle to progress in the arbitration. Excessive use of this procedure is liable to bring the whole process of arbitration in Scotland into disrepute.” Section 3 was swept away by the 2010 Act, under which a court may intervene only in more limited circumstances. Section 1 of that Act (sidenoted “Founding principles”) provides:

“The founding principles of this Act are – (a) that the object of arbitration is to resolve disputes fairly, impartially and without unnecessary delay or expense, (b) that parties should be free to agree how to resolve disputes subject only to such safeguards as are necessary in the public interest, (c) that the court should not intervene in an arbitration except as provided in this Act.

"Anyone construing this Act must have regard to the founding principles when doing so.”

That section broadly reflects s 1 of the (English) Arbitration Act 1996, a statute which in effect set out an arbitration code. It has been said that the features of that statute “add up to a fundamental rebalancing of the relationship between the parties and the arbitral tribunal, in terms not only of rules, but also of psychology” (Mustill and Boyd, Commercial Arbitration, 2001 Companion Volume to the second edition at 52).

Section 13 of the Scottish Act (as read with the Scottish Arbitration Rules) imposes strict limits on the circumstances in which a court can intervene in an arbitration. Broadly, an award may be challengeable in court on the grounds of want of jurisdiction, serious irregularity and legal error. The power to challenge on the ground of legal error is further restricted by it being available only by agreement of parties or with the leave of the court. The incidents of such a challenge were considered by Lord Glennie in Arbitration Application No 3 of 2011 2012 SLT 150. By contrast, where proceedings are instituted in court, there is almost always a prospect of a dissatisfied party being able, without the need for leave, to appeal to a higher court on a wider range of grounds, including alleged errors of fact.

Brighter future

So what, then, is the future for arbitration? In Scotland, domestically, I believe that the 2010 Act (including the Scottish Arbitration Rules set out in the Schedule) presents a new and exciting framework against which arbitration can make significant advances as a satisfactory mode of dispute resolution. Instead of a somewhat uncertain common law background supplemented by occasional statutory provisions, the Act establishes a comprehensive and principled code against which arbitration can be conducted. As in many other jurisdictions, the Act does not incorporate the Model Law, but uses its principles to identify its own rules.

The founding principle that the court should not intervene in an arbitration except as provided for in the Act should give arbitrators confidence to proceed proactively, particularly in procedural matters, and thus expedite the proceedings.

It will be important, however, that arbitrators recognise and adhere to the founding principle that one of the objects of arbitration is to resolve disputes without unnecessary delay. In GI Venues Ltd, Petitioners [2013] CSOH 202 Lord Malcolm had occasion to pass adverse comment on a delay of 10 months between the conclusion of a debate on jurisdiction and the issue of the arbitrator’s decision.

However, while experience of the working of the 2010 Act is at present limited, I believe that it provides a basis for a new and prosperous age for domestic arbitration in Scotland.