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Commercial sense

13 December 10

Why arbitration should now feature as part of every commercial solicitor's duty to advise; and is the latest accredited specialism to be offered

by Brandon Malone

Arbitration? Wouldn’t touch it with a barge pole.” I hear this quite often. To be honest, I used to think the same thing. Arbitration had a reputation for being slow and expensive. We’ve all heard horror stories of arbitrations taking 10, 12 years and more, and we’ve read the cases where things went badly wrong (ERDC Construction v HM Love & Co (No 2) 1996 SC 523, for example). Arbitrations being run like Court of Session actions, ending up in the Inner House. No commerciality. No savings in time or cost. No thanks. And who knew what the law was anyway? Lacunae through which you could sail the Titanic. I excluded arbitration from my contracts as a matter of course.

But things are different now. A lot has changed. For starters, we’ve seen a lot more commerciality come into dispute resolution. We’ve seen this with the commercial courts and in the private dispute resolution sector with the explosion of construction adjudication, where the 28-day format doesn’t allow for the formalities of the courtroom, and pragmatism rules the day. There is an ever-increasing expectation among commercial clients that commercial disputes will be resolved commercially.

With the Arbitration (Scotland) Act 2010, all commercial solicitors, whether they draft contracts or advise in respect of disputes, need to have a working knowledge of the new Act and every solicitor has to consider the merits of arbitration as an alternative to litigation when drafting contracts, and when a dispute arises. If they don’t, at best they’re failing their clients, and at worst, they may be guilty of falling below the required professional standard. Bit of a sweeping statement? Yes, it is. Scaremongering? No, I don’t think so. I’ll explain.

What kind of victory?

When a solicitor drafts or reviews a contract for a client and does not include a dispute resolution clause, that solicitor is making a decision and is impliedly giving advice. The decision is that the default position – litigation – will apply, and the implied advice is that litigation is the appropriate method of resolving the dispute. That may be the appropriate advice, depending on the client’s priorities, but to establish that, it’s necessary to understand the alternatives.

If there is a way of resolving disputes under a contract which is cheap, fast, confidential and private, and you fail to tell your client about it, will the client be unhappy? Let’s take an example.

You have a major client. Their reputation is built on quality and reliability, and their profitability and the value of the company are built on their reputation. They get into a dispute with one of their customers. There is no alternative provision within the contract, and alternatives to court aren’t considered, so, by default, the dispute ends up in litigation. Happily, your clients are successful at first instance, but the other side appeals. On a split decision, the Inner House finds in favour of your clients, but the other side still aren’t satisfied, and appeal to the UK Supreme Court. Eventually, after three years of sustained litigation, and massive expenditure, your clients emerge victorious.

I say “victorious”. What I mean is that four of the Supreme Court justices have backed your clients (albeit for four distinct and mutually incompatible sets of reasons). Having spent quite a lot of money vindicating their position, your clients are keen to recover their expenses. Unfortunately, the episode has proved fatal to the opposition, and the company is now in liquidation.

Worse than that, having had their reputation for quality and reliability traduced by the other side in the full gaze of the public, your clients’ turnover has fallen, as has their market position, and their share price lies in tatters.

Awkward questions

Taking cold comfort from the fact that he has managed to convince his shareholders that the result was the best that could have been expected in the circumstances, your client’s managing director goes to a cocktail party, where as fate would have it, he bumps into a practising arbitrator, who listens sympathetically to his tale of woe. He is, of course, familiar with the case, having read all about it, and having attending a seminar on it at your office and the offices of several of your competitors.

The arbitrator explains that had there been a properly drafted arbitration clause in the contract, your clients, benefiting from the regime in the 2010 Act, could have had the whole issue sorted out in relatively short order, that there would only have been a very limited right of challenge to the award, and that the whole procedure would have been confidential.

“After all,” he continues, “two of the founding principles of the Act are that the object of arbitration is to resolve disputes without unnecessary delay or expense, and that the court should not intervene in an arbitration except in the limited circumstances provided for in the Act.”

At this point, your client develops a twitch and a strong resolve to call you in the morning. In this scenario, would you be comfortable that the client received the best advice when his contract was drafted?

Things you need to know about the new Act

Cost

In an arbitration, it is necessary to pay the fees of the arbitrator and the arbitrator’s clerk (if appointed). However, it’s important to know that these fees will normally be awarded against the other side in the event of success.

It’s also important to know that parties can, if they choose, exclude the right to recover legal expenses from each other. That is, of course, a double-edged sword, but the exclusion of recoverable legal expenses has not dinted the popularity of construction arbitration.

The important point is that the right to refer matters to the court during and after the arbitration can be severely restricted, and rights of appeal can be more or less excluded in all but the most extreme circumstances (fraud, etc).

A straightforward arbitration with no right of appeal will always be less expensive than years of litigation with multiple rights of appeal.

Confidentiality

The default provision under the Act is that the arbitration is confidential and breach of confidentiality by any party to the arbitration is actionable. For clients whose business secrets are commercially sensitive, or where their business is particularly sensitive to reputational issues, this may be a very important consideration.

If an arbitration is referred to the court because of a challenge, then under the Act, the details are anonymised.

Speed

It is a founding principle of the Act that arbitrations are to be dealt with without unnecessary delay. Modern arbitrators are alive to the commercial imperative. However, the beauty of arbitration is that it allows parties to specify a time limit within which the matter must be determined – say 12 months, or six or less. Even with the most proactive commercial judge, court actions will take longer than this and they are, of course, subject to appeal.

Finality

In an ordinary sheriff court action, an unsuccessful party can appeal to the sheriff principal and then to the Inner House and then, if he can get two counsel to certify it, to the UK Supreme Court.

With arbitration, the default position is that parties can apply to the court for determination on various matters: jurisdiction points, legal points and errors of law being the main candidates. Under the new Act, these appeals are dealt with much more quickly than the old s 3 referrals to the Inner House. However, it is possible to exclude point of law referrals and appeals on errors of law, and to limit jurisdiction challenges by agreement. Even where references are not excluded, issues are dealt with in the Outer House by the nominated arbitration judge. In most instances, their decision is final. On certain issues, a further appeal to the Inner House is competent, but not to the UK Supreme Court.

With the Scottish Arbitration Rules amended to exclude point of law referrals, and appeals to the court, arbitration becomes very attractive to clients who want a restricted procedure.

A duty to advise?

The net result of the various innovations introduced by the Act is that there are practical advantages to clients in opting for arbitration. That is not to say that arbitration is always superior to litigation or that it is suitable for every contract or every dispute. The important thing is that clients understand their options so they can make an informed decision.

That information needs to be given to the client when the contract is drafted, but also when a dispute arises. Just because a contract does not provide for arbitration does not mean that parties can’t resolve their dispute by way of arbitration. If both parties think it’s a good idea, then it is open to them to refer the matter to an arbitrator regardless of what the contract says.

But is there actual fault in failing to advise a client of the arbitration option? I say there is. Consider the Council of Bars and Law Societies of Europe (CCBE) Code of Conduct for European Lawyers, which provides at para 3.7.1: “The lawyer should at all times strive to achieve the most cost-effective resolution of the client’s dispute and should advise the client at appropriate stages as to the desirability of attempting a settlement and/or a reference to alternative dispute resolution.”

Now, of course, that code is not binding as such and there will no doubt be situations in which litigation is the most cost-effective way to resolve the dispute. But consider our own standards of conduct. Rule 3 of the Solicitors (Scotland) (Standards of Conduct) Practice Rules 2008 provides:

“(1) Solicitors must act in the best interests of their clients subject to preserving their independence and complying with the law, professional practice rules and the principles of good professional conduct.

“(2) Solicitors must not permit their own personal interests or those of the legal profession in general to influence their advice to or actings on behalf of clients.”

It seems clear to me that clients’ best interests are served when they are given full advice on the types of dispute that may arise on a contract, and the way in which those disputes can be resolved, having regard to the client’s priorities in terms of speed, cost, finality, privacy, at the time they enter into a contract. I would say that any solicitor, or indeed any contractual adviser, putting a contract together for a client ought to be actively advising that client on the advantages of arbitration as compared with litigation and other dispute resolution processes.

That duty to act in the best interests of the client applies equally after a dispute has arisen and it is clear that arbitration ought to be considered, along with the other available dispute methods, even where no provision has been made in the contract.

It follows that any solicitor advising on a contract or advising on a contractual dispute has a duty to understand the merits of arbitration, and to advise their client accordingly.

Arbitration is set to get a higher profile in the coming months through a series of initiatives. Make sure your clients hear about the new arbitration regime from you.

Brandon Malone is a solicitor advocate, and arbitrator. He is convener of the Society’s Arbitration Accreditation Panel, and is currently advising the Scottish Government on the establishment of a Scottish Arbitration Centre.
A version of this paper was first delivered at a joint CIArb/Law Society/Faculty of Advocates/ Edinburgh University conference in June this year.

Arbitration law – a new accreditation

One of the problems of the old arbitration regime was the lack of a mechanism to appoint an arbitrator where this was not provided for in the contract, Brandon Malone writes.

This problem arises where no arbitrator is named, or no appointing body is named, or a named arbitrator is no longer available and no alternative is provided. Under the old law, the court had to step in, but the 2010 Act caters for this and provides for a right to ask an Arbitral Appointments Referee (“AAR”) to appoint an arbitrator.

Various professional bodies, including the Law Society of Scotland, applied to become an AAR. The Society was confirmed as an AAR by the Arbitral Appointments Referee (Scotland) Order 2010; the other approved AARs are Agricultural Industries Confederation Ltd, the Chartered Institute of Arbitrators, the Dean of the Faculty of Advocates, the Institution of Civil Engineers, the Royal Incorporation of Architects in Scotland, the Royal Institution of Chartered Surveyors, and the Scottish Agricultural Arbiters and Valuers Association.

By s 24 of the Act the Scottish Ministers, when authorising a body to act as an AAR, must have regard to the desirability of ensuring that the potential AAR has experience of making arbitral appointments, and is able to provide training and operate disciplinary procedures designed to ensure that arbitrators conduct themselves appropriately.

As part of its application to become an AAR, the Society formulated a structure to ensure compliance with these requirements. A panel of accredited arbitrators will be established and all future arbitral appointments by the Society will be made from that panel (whether as a result of a request to the Society as an AAR or otherwise).

As a first stage in the process, the Society is establishing a new specialist accreditation in arbitration law, on achieving which it will be open to members to apply for accredited arbitrator status. As the law of arbitration deals with procedure rather than substantive law, this accreditation will in some respects have more in common with extended rights of audience in the civil courts than with other accredited specialisms.

Only members who are able to demonstrate satisfactory experience of acting as an arbitrator will be able to apply. Other experience of acting in a judicial capacity (as a temporary/part-time sheriff or tribunal chairman, for example) will also be considered.

It follows that not all arbitration specialists will be accredited. Those without the necessary experience of acting as arbitrator may wish to consider participating in voluntary consumer schemes. A system of pupillage is another option under consideration.

Accreditation in and of itself will be an independent endorsement of expertise in this growth area. For those not interested in practising as an arbitrator, or not yet eligible to become one, accreditation in arbitration law will be a badge of excellence, and will be something that anyone with an arbitration practice should strive to achieve.

The provision of training is a crucial element of being an AAR, and the Society will set up an annual training day in arbitration. Attendance will be encouraged for accredited specialists, and compulsory for those on the panel of arbitrators.

With the coming into force of the new Act, the full backing of the Scottish Government, and plans for a Scottish Arbitration Centre, we can expect an increase in the use of arbitration to resolve disputes in the coming years. Scottish solicitors are ideally placed to take advantage of this increased activity, and cannot afford to ignore it.

It is intended that arbitrators accredited by the Society will be recognised as being of the highest calibre, and that the Society will become a natural choice for those seeking an arbitrator to resolve civil disputes.

Candidates for accreditation will have to demonstrate the required experience of dealing with arbitration, whether representing a party, acting as an arbitrator, or as an arbitrator’s clerk. It will also be necessary to demonstrate detailed knowledge of the new Act.

Anyone interested in accreditation should attend the Society’s Update course on the new Act, which is scheduled for March 2011. I would encourage all solicitors with a dispute resolution practice to attend.

Information on applying for specialist accreditation in arbitration law can be obtained from the Society.

Have your say


Your comment

Michael Miller

Wednesday December 15, 2010, 17:42

Great article. I raised the point at the conference launching the Arbitration (Scotland) Act 2010. From an international perspective as regards the requirement for an Arbitral Appointments Referee I am interested to know whether and how international bodies with experience of making arbitral appointments may fit in.