Arbitration – a law of unintended consequences

A recent Court of Session decision, Arbitration Appeal No 1 of 2019 [2019] CSOH 60 (19 July 2019), offers a rare glimpse into arbitration in Scotland and perhaps also why, almost a decade since the Arbitration (Scotland) Act 2010, it is still not seen as the go-to resolution option for commercial disputes in Scotland.

Bold ambitions

With the passing of the Act, the Scottish Government hoped to increase the use of all forms of alternative dispute resolution nationally and make Scotland an international arbitration hub. While positive steps have been taken to fulfil that ambition, arbitration, as an alternative to litigation and even mediation, remains underused.

The Act provides Scotland with one of the most modern arbitration systems in the world, and yet when faced with an arbitration clause in a contract, clients are often unsure. The impression many have is that arbitration is not cheaper than court, and not always quicker either. It can be difficult to agree an arbitrator, and document recovery is not as readily available. With a system that is arguably less developed than other countries with an established reputation in the international arbitration world, overcoming these perceptions was always going to be difficult. Recently, in a bid to do just that, Ash Denham, Minister for Community Safety, announced a collaboration with the Royal Institute of Chartered Surveyors in Scotland, Faculty of Advocates, Chartered Institute of Arbitrators and the Law Society of Scotland, with the specific aim of promoting Scotland as a world-class centre for dispute resolution for businesses across the UK and internationally.

But promotion, while helpful, is not the same as established track record and reputation. And the main attraction that arbitration offers businesses – confidentiality and reduced appeal rights – may be the very thing that is holding us back.

Statutory confidentiality

To position Scotland as an international player in arbitration, the Act, unlike most jurisdictions, introduced a statutory confidentiality obligation. This has been strongly supported by the Scottish courts. As well as confidentiality throughout the arbitration process, this means that when an appeal is made, the courts keep the parties' names and case details anonymous. It is also possible to persuade the court not to publish the judgment at all. Great for individual businesses, but potentially bad for Scotland’s fledgling reputation in international arbitration.

For it is hard to persuade businesses to favour a Scottish jurisdiction over so many established arbitration seats when it is difficult for them to ascertain what arbitration in Scotland looks like. There is no way of knowing with certainty how many cases are appealed, and crucially, what the court's position is when they are. With implied confidentiality, not a statutory confidentiality obligation, England, for example, can point to a track record in court that confirms that the courts will only interfere where strictly necessary. Of the 274 arbitration appeals lodged in England & Wales between January 2015 and March 2018, only five were successful. Its rich case law also confirms its long and measured approach to arbitration issues.

The lack of transparency that statutory confidentiality engenders is doing nothing to raise the profile of arbitration in Scotland at home or abroad.

It is the very fact of its publication, therefore, that makes the recent arbitration appeal case significant. It provides a rare opportunity to gain some insight into the Scottish courts’ approach to arbitration. Are they hands-on or hands-off?

Approach to permission

The dispute centred on the service of a contractual notice. The petitioner was unsuccessful at arbitration. He sought leave to appeal on the basis that the arbitrator had made a legal error in his interpretation of the contract.

For permission to appeal to be granted based on legal error, the judge required to be satisfied that the tribunal’s decision was “obviously wrong”, a phrase not defined in the Act. It has, however, been interpreted by the courts to mean more than simply considering that, on balance, the wrong decision has been made. Lord Bannatyne found that he could only grant leave to appeal if the arbitrator was “so obviously wrong as to preclude the possibility that he might be right”. The judge could not say that the arbitrator was correct in his decision making. Nonetheless, the test was not met, and the appeal failed.

Commentary

In England & Wales, the appeal test is almost identically worded, and a similar approach to interpretation is taken. This has proved successful in terms of the jurisdiction's reputation as one which takes a sensible hands-off approach. This case confirms that Scotland too can get the balance right when the question is asked of it. More judgments published like this might serve to enhance Scotland’s reputation.

The Scottish Arbitration Centre acknowledges that arbitration in Scotland is underutilised and work needs to be done to change that. While promotion of its benefits remains the focus of the arbitration strategy, it is difficult to promote a system which is so opaque. Confidentiality requires to remain at the heart of the system, but it cannot be at the expense of all transparency. By modifying the statutory confidentiality obligation to ensure anonymous reporting of all appeals, Scotland could prove its capabilities and credentials to the world, providing a platform to build its reputation as an arbitration jurisdiction of excellence.