The Court of Session has confirmed that when an arbitration agreement makes it clear that the arbitrator’s decision is to be “final and binding” upon the parties, it is not possible for parties to appeal an error of law to the court. This decision will be of interest to all those drafting arbitration clauses and using arbitration, in the construction industry and beyond.

At the outset of a contract, construction contracts included, parties are often reluctant to spend time and money considering the minutiae of their dispute resolution clauses. Optimism pervades and in the excitement of getting the deal completed and the ground broken, defaults are resorted to. Whether or not litigation or arbitration is chosen as the final tribunal will frequently come down to whether a party wants disputes to be heard behind closed doors, with arbitration offering the preferred method of keeping disputes confidential. This decision serves as a good reminder that where arbitration is chosen, it is worth paying more attention to the arbitration clause.

The Arbitration (Scotland) Act 2010 (the “2010 Act”) sought to modernise arbitration in Scotland and make it a more accessible form of dispute resolution. The NEC and SBCC standard form suites of contracts now have arbitration as the default forum, and we often see it used in contracts and missives for large-scale development projects. The 2010 Act provides a set of rules for the conduct of an arbitration seated in Scotland (known as the Scottish Arbitration Rules), which are a mix of mandatory and default rules. The mandatory rules are those that will always apply to the arbitration, whilst the default rules apply unless they are specifically disapplied or modified by the parties within their arbitration agreement.The arbitration agreement is normally found within the dispute resolution clauses of a contract, a section of contract drafting which parties tend to wish to skate over. Parties sometimes think that arbitration agreements can be made at the time of the dispute arising and whilst this is not entirely impossible, reaching agreement on such matters proves difficult when parties are already at loggerheads.

Arbitration Application No.2 of 2024 – no legal error appeal allowed

In the recent case of Arbitration Application no.2 of 2024, Lord Sandison in the Outer House of the Court of Session considered the wording of a partnership agreement, rule 69(1) of the Scottish Arbitration Rules and what might be required to disapply this rule.

Following an arbitration under the partnership agreement, one party (called the petitioner) tried to appeal under rule 69. Note the lack of the use of the parties’ names in the court’s decision – this is the confidential effect of arbitration in action. Rule 69(1) allows a party in an arbitration to appeal to court (specifically the Outer House of the Court of Session) against a tribunal’s award, on the grounds that the tribunal erred on a point of Scots law (a “legal error appeal”). Here, the legal error alleged by the petitioner was that the arbitration had been decided on an issue which did not feature in the written arguments, therefore the arbitrator had erred in law and exceeded his jurisdiction.

Rule 69 is a default rule, which can be disapplied or modified if the parties want to. The other party (the respondent) said rule 69 had been disapplied here. Modern drafting for the disapplication or modification of default rules tends to refer to the specific rule numbers. This is attractive because it removes any element of doubt as to what parties intended.

However, in Arbitration No. 2 of 2024, the court examined whether the following phrase in the partnership agreement was sufficient to disapply rule 69(1): “The decision or award of such arbiter shall be final and binding upon all the partners”. It held that it was.

Although the contract also made reference to a section of legislation that is no longer in force (the repealed “stated case” appeal under section 3 of the Administration of Justice (Scotland) Act 1972), the court held this was a further indication that the arbitrator’s decision was to be final and binding on the parties and that the parties did not intend to permit a case to be appealed to the court on any question of law. This is a helpful clarification.

It is also worth appreciating Lord Sandison’s use of the term “arbitrator” versus the partnership agreement’s use of “arbiter”. Under the 2010 Act, which aligned Scots law with the English use of “arbitrator”, all references to “arbiter” are to be read as “arbitrator” where the 2010 Act applies.

Impact

This decision is relevant to all those drafting arbitration clauses and using arbitration. Rule 69 is one of three potential grounds of appealing an arbitral decision to court under the 2010 Act. It is also the only default appeal rule (appeals on the grounds of substantive jurisdiction and serious irregularity being mandatory rules). Disapplying or modifying rule 69 is an important choice, to be considered carefully in the full circumstances of entering into a contract.

Parties who do wish to limit the potential for such an appeal can be reassured from this decision that using the phrase “final and binding” helps to reduce the chance of appeals on questions of law being made. However, the best form of drafting will remain specifically to disapply rule 69, using clear and express wording.

This case also serves as reminder of the high bar to seek the court’s leave to appeal arbitration decisions. Here, the court noted that even if the proposed legal error appeal been competent under the partnership agreement, leave to make an appeal under rule 69 is a “very high hurdle to surmount”, as it requires that the tribunal’s decision on the points in issue was “obviously wrong” under the 2010 Act. This requirement also applies to the mandatory rules for appeals and can only be avoided if the other party agrees to an appeal.

And the biggest takeaway remains: parties should not shy away from paying close attention to their dispute resolution clauses.

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