Scottish Law Commission (Discussion Papers)

 


Part 11      Arbitration, Adjudication and other forms of Dispute Resolution

Introduction

11.1      The terms of our reference include "claims… submitted for decision to arbitration, adjudication or some other form of dispute resolution". Except in cases where a statutory provision requires a dispute to be submitted to arbitration^[1] or adjudication,^[2] the resolution of disputes by a means other than litigation depends upon the parties to the dispute having agreed that it should be resolved in this manner. It is therefore open to the parties to agree what powers, if any, the person to whom the dispute has been submitted should have with regard to the award of interest. The principal questions which we have sought to address in this Discussion Paper are, firstly, whether extra-judicial decision-makers should have power to award interest in the absence of express agreement; and, secondly, if so, whether those powers should be broadly equivalent to those available to the courts or, alternatively, whether extra-judicial decision-makers should be afforded a wider discretion.

Arbitration

11.2      It is common practice for deeds of appointment of arbiters to make express provision with regard to their power to award interest, for example a power to award interest from such date and at such rates as the arbiter may see fit. We are not aware of there being any difficulties in relation to arbitration awards where such a power is expressly conferred.
11.3      Another possibility is that the claimant's entitlement to interest is itself referred to arbitration as occurred (by implication) in Farrans (Construction) Ltd v Dunfermline District Council^[3] and (by express provision) in Elliott v Combustion Engineering Ltd.^[4] In these cases the court held that the arbiter's duty was to apply the general law on entitlement to interest and, in particular, to determine the date from which it could be said that sums successfully claimed had been wrongfully withheld according to the current law. Again, we see no need to make express provision for such referrals. If the law on interest were to be amended in the manner we propose, the arbiter's duty would be to award interest in accordance with the law as amended. The concerns expressed by the Extra Division in Elliott v Combustion Engineering Ltd^[5] would be met.
11.4      It remains to consider the situation where an arbiter or adjudicator is appointed to resolve a dispute regarding a principal sum claimed and there is no express power conferred to award interest. In John G McGregor (Contractors ) Ltd v Grampian Regional Council,^[6] the Second Division held that an arbiter has no implied power to award interest for any period prior to the date of his final decree. In so holding, the court disapproved a statement to the contrary in Irons & Melville.^[7] This decision has been criticised by Professor John Murray^[8] as being contrary to what had been the understanding of Scottish practitioners as well as the law in England, Australia and New Zealand. Professor Murray points out that if the claimant had first raised a court action for payment and then sisted it for arbitration, he would have been able to obtain interest on the arbitration award from the date of citation in the court action. We agree that this is an unsatisfactory situation.
11.5      Scots law lacks a comprehensive statutory code for arbitration which would apply in the absence of agreement to the contrary. It may be that if such a code existed, it would include express provision in relation to the award of interest. The question arises whether, in the absence of a comprehensive code, we should consider whether or not an arbiter should have a power to award interest.
11.6      It is notable that no express provision regarding interest is contained in the UNCITRAL Model Law (which has the force of law in Scotland with regard to international commercial arbitrations) or in the Rules of Arbitration of the International Chamber of Commerce or in the Arbitration Rules of the Law Society of Scotland. On the other hand, express provisions granting wide powers to award interest are included in the Scottish Arbitration Code 1999^[9] and in the London Court of International Arbitration Rules.^[10] In 1996, the Scottish Advisory Committee on Arbitration Law produced a draft Arbitration (Scotland) Bill which, if enacted, would have applied to proceedings where the seat of the arbitration is in Scotland. A revised version of the draft Bill was published in 2003. Clause 22(1) of the revised draft provides:

"In addition to the powers conferred generally or specifically on the tribunal elsewhere in this Act, the tribunal has the following powers (unless the parties otherwise agree):

…

(d) Power to order that simple or compound interest shall be paid by any party on any sum awarded at such rate or rates and with such rests as the tribunal determines to be appropriate without being bound by legal rates of interest imposed by any State, court or any agreement between the parties in respect of any period which the tribunal determines to be appropriate including a date prior to the appointment of the tribunal and ending not later than the date upon which the award was complied with."

It will be noted that the power which the clause would have granted to arbiters differs from the statutory scheme which we are proposing in that the clause confers a wide discretion upon an arbiter to award interest or not as he sees fit.

11.7      Standing the decision in John G McGregor (Contractors) Ltd v Grampian Regional Council,^[11] it appears that the conferring of a "default" power on arbiters to award interest prior to the date of decree would require legislative intervention. However, it might be regarded as unsatisfactory to make specific statutory provision for one aspect of an arbiter's powers while everything else remains regulated in the absence of agreement by the common law. It might also be regarded as anomalous for an arbiter to be granted a wide statutory discretion to award interest from such dates, at such rates and with such rests as he thinks fit, if the scope of judicial discretion in relation to the award of interest in court actions is restricted. If arbiters were given statutory powers which simply mirrored those available to the courts, it would remain open to the parties to agree to confer a wider discretion. On the other hand, it might be regarded as in keeping with the flexibility of the arbitration process that the "default" statutory power to award interest should be a matter of broad discretion. We invite views on the following questions:

47. Should the proposed legislative reform of the law on interest on debt and damages include a provision conferring, in the absence of contrary agreement, a power on the arbiter or adjudicator to award interest for a period prior to the date of the award or should this be left to await the enactment of a comprehensive statutory arbitration code?

48. If arbitration is included in the proposed legislative reform,

(a) should the arbiter's power to award interest be co-extensive with the powers which the court would have in relation to interest (on the various categories of pecuniary claims) under the proposed new legislation; or, alternatively,

(b) should the arbiter's power be exercisable on the basis of a wide discretion such as that contained in Clause 22 of the Scottish Advisory Committee's draft Bill?

11.8      In addition to arbitration agreements at common law, there are a number of statutory regimes which provide that disputes must be referred to arbitration. These are discussed by Professor Fraser Davidson in his work on Arbitration.^[12] They include the following in which the dispute may lead to the making of a pecuniary award:

•    Questions arising between the landlord and tenant of an agricultural holding.^[13]

•    Apportionments of milk quota under the Dairy Produce Quotas Regulations 1997.^[14]

•    A dispute relating to a compensation order under Part II of the Industry Act 1975 (which empowers the Secretary of State to acquire the capital or assets of an "important manufacturing undertaking" which would otherwise pass to a person resident outside the United Kingdom).^[15]

•    Various disputes arising under legislation relating to the acquisition of companies by British Shipbuilders.^[16]

•    Questions arising with regard to coal mining subsidence.^[17]

•    Disputes regarding compensation for unnecessary seizure of goods under legislation such as the Food Safety Act 1991,^[18] or for other unjustified official action.^[19]

•    Disputes regarding compensation for losses arising out of transfers of property to public bodies^[20] or arising out of the exercise of official functions by public bodies.^[21]

11.9      Most of these provisions are in a standard format requiring the dispute to be submitted to an arbiter selected by a specified individual such as the Lord President of the Court of Session. None contains any express power to award interest on any sum which the arbiter finds to be payable. It seems to us to be appropriate that an arbiter appointed under one of these provisions should, in the absence of agreement to the contrary, have the same power in relation to the awarding of interest as an arbiter appointed under an arbitration agreement which is silent as to power to award interest. We therefore propose:

49. An arbiter appointed under a statutory provision requiring a dispute to be referred to arbitration should have the same "default" power in relation to the award of interest as an arbiter appointed under an arbitration agreement.

Adjudication

11.10      The Housing Grants, Construction and Regeneration Act 1996 established a regime known as adjudication for the resolution of disputes arising under construction contracts. In contrast to the position in Scots law regarding arbitration, the Schedule to the Scheme for Construction Contracts (Scotland) Regulations 1998^[22] contains detailed rules for the conduct of adjudication. So far as interest is concerned, paragraph 20(2) of the Scheme provides:

"(2) The adjudicator may take into account any other matters which the parties to the dispute agree should be within the scope of the adjudication or which are matters under the contract which he considers are necessarily connected with the dispute and, in particular, he may -

… (c) having regard to any term of the contract relating to the payment of interest, decide the circumstances in which, the rates at which, and the periods for which simple or compound rates of interest shall be paid."

This provision confers a wide power on adjudicators in relation to the award of interest which is applicable whether or not the parties' contract contains any term relating to the payment of interest. We are not aware of any practical difficulty arising out of it. In the absence of such difficulty, there seems to be no reason to propose any legislative amendment. We invite views on the following question:

50. Is any amendment required to the existing statutory provisions regarding the power of an adjudicator to award interest?

Other forms of dispute resolution

11.11      Not all modes of dispute resolution culminate in the making of a pecuniary award in favour of one of the parties. A power to award interest is necessary only in proceedings which are quasi-judicial in nature, ie where a person is appointed by the parties for the primary purpose of making a decision which will be binding upon them. It seems unlikely, therefore, that questions regarding awards of interest would arise in proceedings such as mediation and conciliation where the function of the person appointed is to promote a consensual resolution of the dispute. There exist hybrid procedures containing features of both arbitration and mediation. If the outcome of a procedure of this type were to be the making of an arbitration award, it seems appropriate for any new legislative provision regarding arbiters to apply. On the other hand, if the outcome is a consensual resolution, there is no need for any legislative intervention as regards interest.
11.12      It would be difficult to anticipate in a statutory provision all the forms which dispute resolution might take. Our provisional view is that it would be unwise to extend the proposed statutory entitlement to interest beyond the methods of dispute resolution presently available which lead to a judicial or quasi-judicial determination of the parties' respective rights and obligations, namely litigation, arbitration and adjudication. However, we would welcome comments in response to the following question:

51. In addition to litigation, arbitration and adjudication, is there any form of dispute resolution in respect of which statutory provision would be desirable with regard to entitlement to interest on a sum found to be payable by one party to another?

Ý
Ü   Þ

Note 1   See paras 11.8-11.9.    [Back]

Note 2   See para 11.10.    [Back]

Note 3   1988 SC 120.    [Back]

Note 4   1997 SC 126.    [Back]

Note 5   See para 1.2.    [Back]

Note 6   1991 SLT 136.    [Back]

Note 7   Irons & Melville, Treatise on the Law of Arbitration in Scotland (1903), p 219.    [Back]

Note 8   "Interest on Debt" 1991 SLT (News) 305, 310-11.    [Back]

Note 9   Article 16(5). The Code was prepared by the Scottish Council for International Arbitration, the Chartered Institute of Arbitrators (Scottish Branch) and the Scottish Building Contract Committee.    [Back]

Note 10   Article 26(6).    [Back]

Note 11   1991 SLT 136.    [Back]

Note 12   F Davidson, Arbitration (1st edn, 2000).     [Back]

Note 13   Agricultural Holdings (Scotland) Act 1991, s 60 and Sch 8.    [Back]

Note 14   SI 1997/733, Sch 3.    [Back]

Note 15   Industry Act 1975, s 20 and Sch 3.    [Back]

Note 16   Aircraft and Shipbuilding Industries Act 1977, s 42 and Sch 7.    [Back]

Note 17   Under the Coal Mining Subsidence (Arbitration Schemes) Regulations 1994 (SI 1994/2566).    [Back]

Note 18   Fair Trading Act 1973, s 32(2); Energy Conservation Act 1981, s 24(2); Consumer Protection Act 1987, ss 14(8), 34(2); Food Safety Act 1990, ss 9(8), 12(10).     [Back]

Note 19   See eg Health Services and Public Health Act 1968, s 71(2), (compensation for stopping work to prevent the spread of disease); Road Traffic Act 1988, s 78(6), (compensation for the cost of taking a vehicle to a weighbridge); Environmental Protection Act 1990, s 43(7) (compensation for immediate suspension of a waste management licence).    [Back]

Note 20   Eg National Parks and Access to the Countryside Act 1949, s 18(3); Transport Act 1968, Sch 4, para 13(3); Ordnance Factories and Military Services Act 1984, Sch 1, para 2(5); Further and Higher Education (Scotland) Act 1992, Sch 3, para 6(4); Coal Industry Act 1994, Sch 2, para 8(6); Atomic Energy Authority Act 1995, Sch 1, para 10(6); Broadcasting Act 1996, Sch 5, para 8(6).    [Back]

Note 21   Eg Civil Aviation Act 1982, s 47(9); New Roads and Street Works Act 1991, ss 133(2), 158; Environment Act 1995, Sch 18, para 6; Water Industry (Scotland) Act 2002, Sch 2, para 6.    [Back]

Note 22   SI 1998/687.    [Back]