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INITIAL REGULATORY IMPACT ASSESSMENT

1. Title of Proposal

The Arbitration (Scotland) Bill.

2. Purpose and intended effect

Objectives

The aim of the Bill is to modernise and codify Scots arbitration law, filling in gaps in that law as required. It will bring most of Scots arbitration law, both domestic and international, into a single user-friendly form.

The Bill will also place a duty on arbitrators to take forward the process without unnecessary delay or expense. This is again intended to make arbitration a more efficient process and a more attractive prospect for parties. The courts will support arbitration by continuing to recognise arbitration agreements, halt court processes and assist by, for example, ordering the attendance of witnesses. Appeals against the arbitrator's final award on grounds of jurisdiction, errors of law, or serious irregularity will also continue to be strictly limited to reduce the opportunities for using appeals to the courts as a means of delaying arbitral processes.

Background

Arbitration as a form of alternative dispute resolution

The essence of arbitration is that it is a procedure whereby parties have agreed to submit a dispute between them to a third party, who often has special expertise or knowledge, and who will act as a private tribunal to produce a final and binding determination of the dispute. By agreeing to go to arbitration, the parties voluntarily deny themselves recourse to the courts or to another method of alternative dispute resolution. They "contract out" of the court process, usually for reasons of commercial expediency.

One of the main advantages of arbitration is that the arbitrator's decision or "award" is final and binding without further court hearing of the issues. An award may be enforced like a court decree. Within countries which have ratified the New York Convention on arbitration, agreements to arbitrate and awards made in other countries will be recognised with no need - in the case of awards - for further review of the issues. Thus arbitration offers major advantages to those engaged in international or cross-border trade.

Arbitration is also a private means of dispute resolution. This is another major advantage to commercial parties who may not want the nature of their dispute or sensitive commercial information debated openly in the courts. The parties can choose their arbitrator which is not possible in the courts. If a technical expert is appointed as arbitrator, this may reduce the need to lead technical evidence so that arbitration may be quick, cost effective and efficient. The arbitration process can provide flexible procedures (as it is privately funded and initiated) and because it is within the parties' control, the location, timing and other arrangements can be planned to suit their particular needs.

Rationale for government intervention

Arbitration is in increasing use internationally, but it is not flourishing in Scotland at present. This may be partly due to a lack of knowledge and awareness of arbitration, but it seems mainly to result from gaps in the present law which makes Scotland an unattractive place to arbitrate. Domestic Scots arbitration law derives primarily from case law and has not been codified into a single Act. It is not clear or readily accessible, nor does it reflect modern practice on arbitration.

For arbitration to work effectively, arbitrators require powers to manage and decide cases. These powers can be derived from the existing law or from the parties' agreement. Under the existing law, arbitrators lack implied powers to award damages, interest or expenses under the general law and so if such powers are not included in the parties' agreement, then they are not available to the arbitrator.

Because the procedure is private, it is difficult to establish numbers or trends relating to arbitration. It has been estimated that there are around 300 arbitrations taking place in Scotland each year, but the Government is undertaking research into the usage of arbitration in order to inform the legislative process.

3. Consultation

Within government

The following government agencies and departments have been consulted in the preparation of this initial RIA:

The Improving Regulation in Scotland Unit.

Public consultation

A public consultation is being carried out on the Arbitration (Scotland) Bill from June to September 2008. The responses, and a summary, will be published before the Bill is finalised and introduced into the Scottish Parliament. The date of introduction depends on when an opportunity arises in the legislative programme.

4. Options

Option 1: Do nothing.

If nothing is done, use of arbitration within Scotland seems likely to decrease further due to the difficulties of establishing what the law is in Scotland and the lack of powers given to arbitrators under the general law. Those parties who do wish to use this form of alternative dispute resolution will almost certainly go to another jurisdiction, most commonly England, where the law has been modernised and codified.

Option 2: Enact the Arbitration (Scotland) Bill.

The Arbitration Act 1996 applying in England, Wales and Northern Ireland sets out in modern form the powers and duties of an arbitrator. Similar codes or legislation in many other countries worldwide have clear frameworks to allow arbitrations to be commenced efficiently and without delay or undue expense. The advantages of a similar model for Scotland are clear.

5. Costs and benefits

Sectors and groups affected

Arbitration is a method of dispute resolution which is normally employed by commercial bodies who wish to use a private method of dispute resolution (as opposed to the public courts) for reasons of commercial confidentiality. Arbitration may also be quicker and cheaper than going to court, although that is not always so. Parties usually agree to use arbitration as their means of dispute resolution when they first contract with each other, and they may trade and transact for many years before some incident causes one party to wish to invoke the arbitration agreement.

Some low cost arbitration schemes are used by some industries and professions whereby consumers can access an arbitrator to resolve their dispute with the company or firm at a much lower cost than going to court because the industry or profession subsidises the arbitration scheme. Such schemes are operated by the Association of British Travel Agents, the Scottish Motor Trade Association and the Institute of Chartered Accountants in Scotland.

Benefits

Option 1: Do nothing.

There would be no benefit and considerable disadvantages from this option. Arbitration law in Scotland would continue to have significant gaps such as the lack of an implied power for the arbitrator to award damages, interest or expenses. It would remain obscure and un-codified making it difficult to find and apply and would continue to lag behind other jurisdictions where arbitration law has been codified in modern legislation. Scotland would continue to be an unattractive place in which to seat arbitration proceedings. Cross-border and international arbitrators would simply not consider holding proceedings here and the use of arbitration domestically would be likely to decline.

Option 2: Enact the Arbitration (Scotland) Bill.

This option would allow the law of arbitration to be clarified, modernised and codified. Gaps in the law would be removed and arbitrators and the parties engaging them would benefit from a modern, codified system of arbitration

Costs

Option 1: Do nothing.

While there are no direct costs associated with this option, it would mean that arbitration proceedings in Scotland would not benefit from having a modernised codified framework to follow as in other jurisdictions.

Arbitration may be a very expensive option in Scotland at present. There are no explicit duties imposed on arbitrators in Scotland and the courts' powers of control are not explicitly stated in statute. The costs may rise further if a legally qualified "clerk" is appointed to assist the arbitrator. There is little control over what fees an arbitrator may charge (or over his work quality or efficiency) and costs can quickly escalate beyond the control of the parties. In contrast, other jurisdictions have laws allowing the taxation of arbitrator costs upon the application of a party or parties.

It is argued that Scotland loses income and inward investment from large international arbitrations choosing not to locate in Scotland. It is understood that most of the arbitration work which originates from oil exploration and production in the North Sea goes to England. Potential inward investors find current dispute resolution procedures inadequate.

Arbitration is much used in other parts of the UK for consumer and small claim disputes under schemes funded by trade bodies, but run independently by the Chartered Institute of Arbitrators or simply by way of lower fee arbitrations. It can thus provide good value to consumers and small businesses, but these types of smaller claim arbitrations are often difficult to establish in Scotland due to the lack of a framework for arbitration that a modern Bill would provide.

Option 2: Enact the Arbitration (Scotland) Bill.

The Bill is intended to set out almost all Scots arbitration law, both domestic and international, into a single user-friendly form. It should make arbitration a much more attractive option in Scotland and the Bill will place a duty on arbitrators to resolve the dispute without unnecessary delay or expense.

At present, if arbitration agreements do not contain detailed provisions on whom the arbitrator is to be, what procedures are to be followed then the start of the arbitration will be delayed until the parties agree these matters. The Bill will provide default rules on these matters which will apply in the absence of agreement to the contrary and thus such delay would be avoided. The framework in the Bill should make arbitrations proceed more efficiently and cost effectively.

The Government would welcome any information from consultees which indicates how much the costs and benefits might be - to be included in the final RIA. We intend to undertake more detailed research in order to produce more robust cost and benefit figures in due course. In the mean time we would welcome views, especially those supported by quantifiable evidence on the likely costs and benefits of the various options identified.

Please also feel free to suggest any alternative methods for reaching the objective and highlight any possible unintended consequences of the policy, and practical enforcement or implementation issues.

6. Small Firms Impact Test

It is not anticipated that the reform of arbitration law will have any impact on small businesses, however, we would welcome comments from any small business on possible impacts. There are safeguards in the Bill which are intended to protect parties who may be in dispute with another which has greater financial resources.

7. Legal Aid Impact Test

Legal aid is not available for arbitration at present and, given the private nature of arbitral proceedings, it is not envisaged that it should become available.

8. "Test Run" of business forms

There are no statutory business forms introduced by these rules.

9. Competition assessment

The Arbitration (Scotland) Bill is not expected to have any impact on competition. All users of arbitral services and arbitrators themselves are dealt with equally under its provisions. It is a matter of choice for the parties to a current or potential dispute as to whether they wish to agree to use arbitration to resolve the dispute, as opposed to another form of dispute resolution such as mediation or indeed litigation.

The Bill will provide a framework of rules which will apply unless the parties agree to use some other set of rules. Some of the rules in the Bill will be mandatory to ensure that once the parties have agree to go to arbitration then this will not be frustrated or delayed by obfuscation over a choice of rules (or, for example, the arbitrator) and also to make sure that the arbitration proceeds efficiently.

10. Enforcement, sanctions and monitoring

The rules in the proposed Bill will be enforced by arbitrators in the first instance, though parties will be able to challenge final awards made by arbitrators in the Court of Session on grounds of lack of jurisdiction, serious irregularity or error in law.

11. Declaration and publication

Consultation

This initial RIA and the proposals contained in the accompanying consultation paper are now produced for comment. It has been distributed to a range of key stakeholders with an interest in arbitration and dispute resolution.

It is also available on the Scottish Government website consultations page.

Contact

Any queries about this RIA should be addressed to:

Alison Dewar

Tel: 0131 244 5764
Fax: 0131 244 2195
Email: alison.dewar@scotland.gsi.gov.uk

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