The law relating to arbitration in Scotland has long been regarded as unsatisfactory and not fit for purpose in a 21st century commercial environment. A mixture of common law and statute, the legal position is unclear and its perceived inaccessibility has been regarded as an impediment to its use.

As such, the introduction into Scots law of a new arbitration regime, in the form of the Arbitration (Scotland) Act 2010, is regarded by many as a welcome development that it is hoped will make this process more accessible, for both domestic and international disputes.

The Arbitration (Scotland) Act 2010 received Royal Assent on 5 January 2010, with much of the Act expected to come into force in the next few months.

The effect of the Act is to introduce, for the first time, a codified set of Scottish Arbitration Rules having application to both Scottish domestic and international arbitrations. The rules are intended to be comprehensive and to address the perceived inadequacies of Scotland as a centre for arbitration, particularly on the international front, on the grounds of cost, delay and lack of certainty in the outcome. Arbitration in Scotland has evolved under the influence of common law, statute and codes such as the New York Convention 1958 and the UNCITRAL Model Law 1966 but has lagged behind other jurisdictions in recent years. If the purpose of the Act is realised, all that is about to change.

The underlying principle remains the same. Arbitration involves parties agreeing to submit a dispute to a third party, who to all intents and purposes acts as a private judge in order to produce a binding determination on the parties. The intention is that the parties then give up their right to go to court or use some other means of dispute resolution. However, the Act will give arbitration more teeth, and it introduces new elements in the manner in which arbitrations will be conducted, that contracting parties need to be aware of from the outset.

The new arbitration regime

The Act itself has two component parts. The enabling provisions are in the main body of the Act and the Scottish Arbitration Rules are contained in a Schedule to the Act. The rules themselves are further distinguished between mandatory rules, which cannot be contracted out of, and discretionary rules, which can with the prior agreement of both parties to the contract. The upshot of all this is that parties agreeing to use arbitration as a means of dispute resolution in their contracts will need to consider to what extent the discretionary rules contained in the Act should be amended as a framework for resolving disputes. In the absence of agreement to the contrary, the discretionary rules will apply by default.

In many instances, documents containing general arbitration clauses may well have been overlooked or drafted in very general terms precisely because of the perception that arbitration was something best avoided. In cases where an arbitration clause exists, the rules in the Act will be imposed on the parties. Transitional provisions in the Act mean that whilst the rules would not apply to an arbitration begun before commencement of the Act, the Act and Rules will otherwise apply to an arbitration agreement (namely an agreement to submit a present or future dispute to arbitration – in many cases this may be a simple clause in a contract) whether made before or after commencement of the Act. In other words, the Act and Rules will have retrospective effect to contracts entered into prior to the Act coming into force.

The principal provisions of the Act

Among the key elements of the Act, the following merit special attention:

  • The Act allows arbitrators to rule on their own jurisdiction, a provision common to many international arbitration regimes and designed to limit outside interference from the courts.
  • The Act effectively brings to an end the ability of parties to state a case on a point of law under Section 3 of the Administration of Justice (Scotland) Act 1972. The general view was that this was too easy to invoke and therefore undermined the whole purpose of arbitration. The Act sets out in its place a much more limited appeals procedure to challenge an award for error in law – an appeal can only be made either with the agreement of the parties or with the leave of the Outer House of the Court of Session (and then only in limited circumstances).
  • One of the mandatory rules is the power of the arbitrator to order payment of a sum of money. The arbitrator can also order interest to be paid. The default/discretionary rules include additional powers - an arbitrator can make an award of a declaratory nature, order a party to do or stop doing something and make an order for the reduction of any deed or document.
  • The intention is that arbitration will be final and binding on the parties. This was always the intention with arbitration but the reality was somewhat different. The Act sets out a much more limited set of circumstances in which an arbitration award may be challenged. The grounds of challenge are restricted to the following: (a) the arbitrator not having jurisdiction to make the award; (b) cases of "serious irregularity" which have resulted in substantial injustice; and (c) legal error (by the arbitrator) as noted above.
  • The Act provides that the parties may apply to the Scottish courts to have an arbitral award enforced, and an award will also continue to be separately enforceable if the parties have agreed to the arbitration agreement being registered "for execution" in the Books of Council and Session.
  • Neither the arbitrator nor the parties to the agreement must disclose confidential information in relation to the dispute, the arbitral proceedings or the arbitrator's award. This is a default rule and can be varied. It reinforces current arbitration practice.
  • The period within which legal proceedings can be raised (under current prescription and limitation rules) can be interrupted by the commencement of arbitration. The Act provides also for the suspension of any legal proceedings where the matter in dispute is the subject of a valid agreement to arbitrate.
  • The concept of separability will apply. Essentially, an arbitration agreement will not be void, voidable or unenforceable only because the agreement it forms part of is void, voidable or unenforceable. As such, any dispute about the validity of an agreement that contains an arbitration agreement may still be arbitrated on in accordance with that arbitration agreement.
  • The regime protects the anonymity of the parties by providing that where arbitration becomes the subject of court proceedings (for example in the case of appeal) the identities of the parties to the arbitration are not to be disclosed outwith the court.
  • The Act allows the Scottish Ministers to update Scottish arbitration law to reflect changes in international arbitration practice, reflecting the government's desire that Scotland be seen as a centre for international arbitration. The policymakers formed the view that as an English speaking country, Scotland would be seen as an attractive venue for arbitration particularly when also taking into account lower legal fees (when compared to other destinations such as London) and an ongoing perception regarding the neutrality of the Scottish legal system.

The benefits of a clear and accessible process

The new Rules should bring much needed impetus to arbitration as a means of dispute resolution in Scotland. It may encourage a fresh assessment to be made on how disputes should be resolved in a wide range of standard commercial disputes, for example rent review clauses in leases, construction contracts, property and contractual disputes, the management of tenement properties, service charges and so on (where up until now other means of resolving disputes may have been adopted) but of course it is of potentially much wider application.

The ability to have disputes settled quickly by an expert without recourse to litigation is a powerful and attractive tool in today's world. It remains to be seen the extent to which industries, trades and professions establish their own arbitration schemes in light of the new Act as the government hopes.