Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2011] CSOH 164
P487/11	OPINION OF LORD GLENNIE in ARBITRATION APPLICATION NO 3 OF 2011 For leave to appeal against an arbitration award on grounds of legal error in terms of Rules 69 and 70 of the Scottish Arbitration Rules __________

Neither party was represented.

Under Rule 70(5) of the Scottish Arbitration Rules,

the application was determined without a hearing

5 October 2011

Introduction

[1] This is an application for leave to appeal, on grounds of legal error, against an award of an arbitrator. This is the first such application under the Arbitration (Scotland) Act 2010 ("the Act") and the Scottish Arbitration Rules ("the Rules") set out in Schedule 1 thereto. Such applications are regulated by Rule of Court 100 ("RC100"). As well as dealing with the leave to appeal issue, this Opinion addresses certain procedural matters with a view to offering guidance to practitioners.

The Act

[2] The Act came into force on 7 June 2010. In general terms, it applies only to arbitrations begun after that date, but (unless the parties agree to the contrary) does so even if the arbitration agreement was made before then: s.36(1)-(3). It marks a new beginning for arbitration in Scotland, recognising the desire in this field for party autonomy, privacy and finality. This is reflected in s.1, which sets out the "founding principles" to which the court and arbitrators, in construing the Act, must have regard. These include the need for fairness, impartiality, expedition and economy in dispute resolution; freedom (subject to certain safeguards) for parties to decide for themselves how to resolve their disputes; and limits on the scope for court intervention in the arbitral process. An earlier step on this road in Scotland was taken in the Law Reform (Miscellaneous Provisions) Scotland Act 1990, s.66 and Schedule 7 of which applied the UNCITRAL Model Law to international commercial arbitrations. Whilst adhering to the philosophy underlying the Model Law, the new Act represents a departure from that earlier approach in two respects. First, rather than simply applying the provisions of the Model Law en bloc to arbitrations in Scotland, it follows the approach in the (English) Arbitration Act 1996 of setting out in the Act a tailor made set of provisions covering all stages of the arbitral process in a Convention compliant way. Second, it applies (or will eventually apply) to all arbitrations in Scotland, not just international commercial arbitrations.

[3] The Act provides that legal proceedings in respect of an award, and indeed in respect of any act or omission by a tribunal in the conduct of an arbitration, are competent only as provided for by the Act: s.13(1). That makes it clear that, in arbitrations to which the Act applies, the court cannot intervene by way of judicial review or declarator, nor is there any longer any jurisdiction to bring a legal challenge to an award by way of a stated case, a procedure introduced into Scotland by s.3 of the Administration of Justice (Scotland) Act 1972. Instead all questions relating to the arbitration, whether about the composition or jurisdiction of the tribunal, its conduct of the arbitration or its award, are governed by the Act and the Rules.

Challenging an award

[4] So far as awards are concerned, as distinct from questions relating to the tribunal or the conduct of the arbitration, s.13(2) of the Act provides that

"a tribunal's award is not subject to review or appeal in any legal proceedings except as provided for in Part 8 of the Scottish Arbitration Rules."

Part 8 of the Rules is headed "Challenging Awards". It provides for three distinct types of challenge to an award: (i) a "jurisdictional appeal" under Rule 67, on the ground that the tribunal did not have jurisdiction to make the award; (ii) a "serious irregularity appeal" under Rule 68, on the ground of serious irregularity, generally, but not exclusively, in the conduct of the arbitration; and (iii) a "legal error appeal" unde Rule 69, on the ground that the tribunal erred on a point of Scots law. Whereas Rules 67 and 68 are "mandatory rules", which cannot be modified or disapplied by the parties (see s.8 of the Act), Rule 69 is a "default rule" which applies only in so far as the parties have not agreed to modify or disapply it (s.9). The parties here have not agreed to modify or disapply it.

[5] The proposed appeal with which this application is concerned is a legal error appeal under Rule 69.

Legal error appeals - the requirement for leave

[6] The right to make a legal error appeal is constrained by Rule 70. As under the English Act, such an appeal may be made only with the agreement of the parties or with leave of the court: Rule 70(2). There has been no agreement of the parties in this case. Leave of the court is, therefore, required.

[7] In terms of Rule 70(3), leave to make a legal error appeal may be given only if the court is satisfied:

"(a) that deciding the point will substantially affect a party's rights;

(b) that the tribunal was asked to decide the point; and

(c) that, on the basis of the findings of fact in the award (including any facts which the tribunal treated as established for the purpose of deciding the point), the tribunal's decision on the point -

(i) was obviously wrong, or

(ii) where the court considers the point to be of general importance, is open to serious doubt."

In so restricting the right of appeal on legal error grounds, the Act "enacts a concern, in the interests of party autonomy, privacy and finality, that such awards should not be readily transferred to the courts for appellate review", to quote the observations of Rix LJ in relation to s.69 of the (English) Arbitration Act 1996 from which the Act takes its inspiration: c.f. CGU International Insurance plc v AstraZeneca Insurance Co Ltd [2007] 1 Lloyd's Rep 142, at para.3.

[8] The words in parenthesis in para.(c) were put in to allow for a situation, not uncommon in Scottish procedure, where the tribunal makes a decision after a debate on the pleadings, taking the relevant averments pro veritate. Otherwise the wording of Rule 70(3) is almost identical to that of s.69(3) of the English Act, the main differences being in para.(c)(ii), where the English Act speaks of "general public importance" instead of "general importance" and inserts the words "at least" before "open to serious doubt". These differences are of no significance. The English Act also includes a requirement, in s.69(3)(d), that despite the agreement of the parties to resolve the matter by arbitration, "it is just and proper in all the circumstances for the court to determine the question". There is no such express requirement in the Scottish Act, but it is in my view implicit, since the grant or refusal of leave becomes one for the discretion of the court if the pre-conditions in Rule 70(3) are satisfied. In substance, therefore, the test for the grant of leave is the same in both jurisdictions. Since the Act was closely and unashamedly modelled on the English Act, and reflects the same underlying philosophy, authorities on the that Act (and its predecessor, the Arbitration Act 1979) in relation to questions of interpretation and approach will obviously be of relevance. There is no point in re-inventing the (arbitration) wheel. In the written submissions relating to this application, both parties have helpfully referred to authorities on the approach to granting leave to appeal under the English Act.

Applications under the Act - generally

[9] All applications and appeals under the Act are governed by RC100. In terms of RC100.5, all such applications and appeals must be made by petition (or, if proceedings are already depending before the court, by a note in that same petition procedure). This is not intended to introduce the formality often associated with petition procedure. Many of the rules relating to petition procedure are disapplied by RC100.4. The intent is to make the the procedure as flexible as possible. RC100.7 sets out the matters which should, so far as is necessary, be identified in the petition. Apart from those requirements, it should not be necessary to set everything out at length in the petition. The basis of the challenge, placed (so far as relevant) in the context of the underlying dispute and what has happened in the arbitration, should be set out as simply as possible. By the time an application or appeal comes to be made, the underlying dispute will usually (though not always) be very familiar to both parties.

[10] Upon lodging a petition seeking relief (of any kind) under the Act, the petitioner will enrol a motion for intimation and service: RC100.5. Except in the case of a legal error appeal where leave to appeal is required (as to which, see below) the order for intimation and service will normally provide for answers to be lodged by the respondent. After service, and after expiry of the requisite period for lodging answers, the petitioner must then enrol a motion for further procedure. This enables the court to take hold of the case and ensure that it is dealt with as expeditiously and economically as possible. The motion for further procedure is an essential case management step. On the hearing of the motion, the court will order such further procedure as is appropriate in the circumstances: see RC100.3. The order made will clearly depend upon the nature and subject matter of the application. Thus, in the case of a legal error appeal, where the point of law will be argued on the basis of the facts found or assumed in the award, the legal argument for each party will have been set out, briefly but adequately, in the petition and answers, so the court may simply fix the date for a hearing (in effect a debate) and, if required, set down a timetable for exchange of notes of argument in advance. Further pleading, or adjustment of pleadings, is to be discouraged. However, in the case of a challenge which potentially raises disputed issues of fact (e.g. a serious irregularity challenge), then, depending always on the particular issue raised in the petition, it might be necessary to have an exchange of further pleadings (possibly restricted to the particular issue) followed by an exchange of witness statements, leading up to a proof or other hearing to determine the application. There is no one right way to proceed. The important thing, in line with the founding principles set out in section 1 of the Act, is that the procedure be simple and flexible, framed (with the assistance of the parties) to deal with the particular issues before the court, and designed to enable the dispute to be resolved as expeditiously and economically as possible, so far as is consistent with fairness. In a legal error appeal, the court will aim to fix a hearing to enable the dispute to be decided within weeks of leave to appeal being granted. In jurisdictional and serious irregularity appeals, a longer timescale may be necessary.

Legal error appeals

[11] As with all challenges to the award, the award should be lodged in process at the same time as the petition is raised, and it should be possible in the petition to explain the material circumstances, the points in issue and the basis of the legal challenge by cross-referring to the award. Whether it will be necessary to lodge other documents, such as the contract between the parties or the pleadings in the arbitration, will depend on the circumstances.

[12] One peculiarity of a legal error appeal is that the petition must say whether or not the appeal is made with the agreement of the other party to the arbitration: RC100.7(g). If it is made with the agreement of the other party, there is no requirement for leave; so after expiry of the time for answers, a motion for further procedure must be enrolled, and at the hearing of that motion, as stated earlier, directions will given fixing a short timetable for notes of argument, if such are needed, and a date for the hearing of the appeal. If, however, the legal error appeal is not made with the agreement of the other party to the arbitation, an application must first be made for leave.

Legal error appeals - applications for leave

[13] RC100.8 prescribes the additional procedure required in the case of a legal error appeal for which leave is required .

[14] In such a case, the petitioner must, at the same time as lodging his petition, enrol a motion for leave to appeal and lodge any documents intended to be relied upon in the application for leave: RC100.8(1). The motion for leave must identify the point of law sought to be raised and set out the grounds relied on for the giving of leave: RC100.8(2). Much of this - particularly the circumstances of the dispute and the award, the identification of the point of law and the legal argument in support of the appeal - may already be set out in the petition, in which case it need not be set out again in the motion. But the motion (or paper in support of it) is the obvious vehicle for the petitioner to set out his case as to why leave to appeal should be granted: c.f. Rule 70(4). It should address the various parts of the test listed in Rule 70(3).

[15] Before the court decides the application, the respondent is given an opportunity to put in grounds of opposition, and to lodge with such grounds any evidence he seeks to rely upon in opposition to the application for leave: RC100.8(3). Accordingly, in a case where leave to appeal is required, when the petition is lodged, the order for intimation and service should not provide for the respondent to lodge answers to the petition. Instead the respondent should be allowed a period of time to lodge and intimate to the petitioner grounds of opposition to the application for leave, together with any evidence relied on by him in support of that opposition. The motion for leave will then be continued for further consideration in light of any grounds of oposition lodged by the respondent. In this case 14 days were allowed for lodging grounds of opposition, and grounds of opposition were lodged within that period.

[16] Rule 70(5) and RC100.8(4) provide that in the ordinary case the application for leave will then be dealt with without a hearing. This is a new procedure and the rule is silent on whether the petitioner is required to take any step to bring the motion for leave back before the court. In the absence of such a requirement, a system has been initiated for ensuring that motions for leave are dealt with promptly after the expiry of the time allowed for lodging grounds of opposition. The process will be marked in the petition department with a note to the effect that, upon the lodging of grounds of opposition, the process is to be passed to the commercial clerks to place before an arbitration judge at the earliest opportunity for a decision on the application for leave. In addition, in future cases, the interlocutor for service and intimation should require the petitioner, within a specified time, to lodge in the process the certificate of service on the respondent: this will enable the petition department to calculate the time allowed for lodging grounds of opposition, so that even if no grounds of opposition are lodged within that time the application will be put before a judge promptly for decision. But while the system is bedding down, and in any case in the event that no grounds of opposition are lodged, it would be helpful if the petitioner's agents could take steps to ensure that the motion is brought back before the court at the earliest opportunity after expiry of the relevant period for a decision on the application.

[17] The application for leave is considered by a nominated arbitration judge: see Rule of Court 100.2. As stated above, unless satisfied that a hearing is required, the court must determine the application for leave without a hearing. The default position, therefore, is that the application is decided on paper. That is what has happened in this case.

[18] Having considered the motion and any grounds of opposition, the court will reach its decision on the application for leave on the basis of a necessarily brief reading of the award and the arguments put in by the parties. It will in my view always be appropriate to give brief reasons for the decision. Where leave is refused, some reasons must be given in order to comply with Art.6 ECHR: see North Range Shipping Ltd v Seatrans Shipping Corpn [2002] 1 WL 2397. Rule 70(3) contains a variety of "threshold tests". At the very least, an unsuccessful applicant for leave should be told which of those tests he has failed: ibid para.27. But the extent of the reasons required will vary depending on which of the tests it is. In North Range Shipping, at para.27, the Court of Appeal said this:

"If the question is not one of law, does not substantially affect the rights of one or more of the parties or is not one which the tribunal was asked to determine, an adequate reason for the judge's decision will in almost all cases have been given simply by identifying the test or tests which the applicant has failed without the need to say more. The same applies we think to the question of general public importance. However, when one gets to whether the tribunal's decision was obviously wrong or not open to serious doubt, we do not think that it is possible to give an unqualified answer to the question we have posed. It may be enough simply to refer to the statutory test, but we do not think it is possible to say that this will always be so. It would be enough to say "For the reasons given by the arbitrators" if that was the judge's reason. Otherwise it may be necessary to go further. But any further reasons need only be brief, so as to show the losing party why he has lost. Such reasons will of course be given against a background of a full hearing, a reasoned award and detailed submissions as to why leave to appeal should be granted. In other words, the judge's brief reasons are directed to a fully informed applicant."

Those remarks are equally applicable to the refusal of leave to make a legal error appeal under the Scottish Act. For my part, I consider that brief reasons should also be given where leave is granted, but they can be even briefer and should avoid going too much into the legal arguments which will, unless the case settles, be the subject of much fuller debate at the hearing of the appeal. Because of the possible desire for anonymity (see below), it would not be my intention to publish decisions on the grant or refusal of leave on the judicial website, unless they raised issues of law or practice.

[19] The court's decision of an application for leave to make a legal error appeal is final: Rule 70(6). If leave is refused, therefore, that is the end of it. The order refusing leave should refuse the prayer of the petition, unless, of course, the petition (as it may do) includes another application, for example a serious irregularity appeal, which does not require leave. If leave to make a legal error appeal is granted, however, it will be necessary to fix further procedure, e.g. to fix a short timetable for an exchange of notes of argument and appoint a date for the hearing of the appeal. To this end the court will, in such circumstances, put the case out By Order soon after the grant of leave. The By Order hearing will be treated for all purposes as a motion for further procedure under RC100.5(5). This is important in considering any claim to anonymity.

[20] Rule 70(7) provides that any leave to appeal expires 7 days after it is granted. This provision did not, I suspect, contemplate a practice where the motion for leave to appeal accompanied rather than preceded the lodging of the petition, the petition being the appeal document. If leave is granted, it does not seem to me that any further formal step is required of the petitioner other than to attend the By Order hearing and comply with such directions are given there.

Anonymity

[21] The Rules aim to protect confidentiality in and relating to the arbitration: see Rule 26. That confidentiality may, however, be put at risk if one or other of the parties takes proceedings in court under the Act. S.15 of the Act seeks to address this by entitling a party to civil proceedings relating to an arbitration (other than proceedings for enforcement under s.12) to apply to the court for an order prohibiting disclosure of the identity of a party to the arbitration in any report of the proceedings.

[22] The practical problem of how to protect that anonymity pending such an application is addressed in RC100.9. It provides that any application for anonymity shall be made not later than the hearing of the motion for further procedure under RC100.5(5), i.e. by the end of the hearing of that motion. Until then, the petition will not be available for inspection, except by court staff and the parties, the petition shall be referred to publicly, e.g. in the Rolls of Court, as "Arbitration Application" or "Arbitration Appeal" and by number and year. Hence this petition is referred to as Arbitration Application No.3 of 2011; and that anonymity is preserved in the heading of this Opinion. In giving my decision I have tried to avoid setting out any details which might betray the identity of the parties. Explanation of the points at issue is necessarily lacking in particulars.

The present case

[23] I now turn to consider the present application for leave. The award in question is a part award issued by the arbitrator in a revised form on 18 August 2011. The subject matter of the award is a building contract. The petitioner, the employer under the contract, is the claimant in the arbitration; and the respondent to this petition, the contractor, is the respondent in the arbitration. The arbitrator was asked by the parties to decide a number of preliminary issues. In his award he explains the issues and gives his decision on each in a careful and readily intelligible manner. The petitioner challenges his decision on two of the issues.

[24] The first issue relates to para.278 of his award, where the arbitrator held that the onus lies on the employer to prove that any money previously paid to the contactor is too much.

[25] The contract provides for payment at various dates of a sum representing an assessment by the contractor (to be approved by the project manager) of the price of work done to the relevant date. That involves a continuing and cumulative assessment from one period to the next. In the arbitration, the employer claims that it has paid in excess of the sum actually due to the contractor, while the contractor claims that further sums are due. The arbitrator held that although the legal burden or onus was on the contractor to prove that further monies were due to it, the onus lay on the employer to show that it had overpaid. The employer argues that this conclusion is inconsistent with the detailed payment provisions of the contract, where any approval by the project manager is provisional, for the purpose only of assessing the amount of any interim payments, which are, in any event, themselves subject to subsequent correction.

[26] Going through the requirements of Rule 70(3), I am satisfied that the appeal raises a point of law (both generally and on the proper construction of the contract), that the tribunal was asked to decide the point, and that a decision on the point will substantially affect the rights of the parties. As to this last point, although the result of the decision cannot presently be expressed in money terms, placing the onus on one party rather than the other is likely to have a significant impact on the whole conduct of the arbitration and might well affect the final result. I also consider that the point is one of general importance. It arises under a standard form of building contract. Although building contracts contain different provisions for interim payments, and much will depend on the particular terms in each case, the general approach is likely to apply across a range of such provisions. While I am not prepared to say, on a necessarily quick reading of the award and the arguments for and against, that the arbitrator was obviously wrong in the decision that he reached, I have formed the view that his decision is open to serious doubt. Not only is there a potential difficulty in squaring his decision with the essentially provisional nature of the assessments made for the purposes of triggering interim payments, but there is also a possible mismatch with the burden being placed upon the contractor to justify its claims to additional sums (which burden means that it must show on a cumulative basis how much is due). These are matters which will no doubt be explored in more detail at the hearing of the appeal and it would not be appropriate to say more at this stage.

[27] The second issue relates to para.363 of the award, where the arbitrator held that the petitioners' averments about a tender from another contractor had no relevance.

[28] The point was presented in the petition as a point of law, on the basis that averments in the pleadings about that other tender could not necessarily be said to be irrelevant, applying the well-known test in Jamieson v Jamieson 1952 SC (HL) 44, 50. I am not persuaded that a Jamieson approach is apposite to what appears to me to be an evidential point. As I read the relevant paragraphs of the award, the point is really an evidential one. This, I think, is rather what the arbitrator thought. Giving a sensible interpretation to what is written there, I think the arbitrator was saying no more than that this evidence was not going to help him and was not sufficiently probative to justify its admission.

[29] I do not consider that this issue raises a point of law. Pleadings in arbitration need not, indeed normally should not, follow the form of pleadings in common use in the Court of Session. It is for the arbitrator to decide questions as to the admissibility, relevance, materiality and weight of any evidence: Rule 28(1)(b). It is not to be assumed that the absence of averments directly on the point will mean that evidence relating to it is inadmissible. Even if the averments are excluded, the evidence may still be admitted. That is for the arbitrator. The petitioners complain that the arbitrator misunderstood the potential relevance of the evidence. If so, so be it. That is not a complaint which the court can entertain. They can try again, at an appropriate stage, to persuade him of its relevance. The exclusion of the averments from the pleadings seems to me to be irrelevant to that question, though ultimately that is for the arbitrator to decide, not the court.

[30] Even if the question is one of law, I am not persuaded that the arbitrator was obviously wrong. That is the test that has to be met, since is not suggested that this point is one of general importance. They fail to meet it on this second point.

Disposal

[31] I shall grant leave to appeal in the first point raised in the motion but not the second.

[32] I shall put the case out By Order on 7 October at a time to be fixed, to fix a timetable for any notes of argument which may be thought necessary for the hearing of the appeal, and to fix a date for that appeal.