Since coming into force on 7 June 2010, section 10 of the Arbitration (Scotland) Act 2010 ("Section 10") has been cited in only eight reported cases. Interestingly, five of those have been in the last 18 months, with the most recent being the decision of Lord Braid in Peter John Morton & Others v British Polar Engines Limited issued on 23 November 2021.
In this blog, I consider the decision not to sist the legal proceedings and contrast this with Lord Clark's decision in July 2020 in actions brought by Heart of Midlothian Football Club and Partick Thistle Football Club where a sist was granted to allow arbitration proceedings to take place. Do these decisions indicate a different approach to that of the English Courts?
Section 10
Under Section 10, legal proceedings must be sisted (i.e. suspended) if they are in respect of a matter which the parties have validly agreed to refer to arbitration. In order to apply to court for a sist of the action under Section 10, the applicant must not have taken any step in the legal proceedings to answer the claim made against them, or "otherwise acted since bringing the legal proceedings in a manner indicating a desire to have the dispute resolved by the legal proceedings rather than by arbitration".
In the Morton case, the pursuers were the trustees of a pension fund that was governed by a trust deed and rules. The defender was the sole employer liable to pay contributions to the fund. The pursuers sued for payment of unpaid contributions. The defender lodged defences in which it disputed its liability to pay the contributions. Subsequently, the defender asked the court to sist the action on the grounds that the issues in dispute required to be determined by arbitration by virtue of an arbitration clause in the trust deed which governed the fund.
The actions by Hearts and Partick Thistle were the much-publicised attempt to challenge the decision of the Scottish Professional Football League ("SPFL") which resulted in the relegation of those clubs from their respective divisions. The challenge took the form of petitions under the Companies Act 2006 alleging that the affairs of the SPFL had been conducted in a manner which was unfairly prejudicial to the clubs. The SPFL argued that the proceedings should be suspended pending the outcome of an arbitration process.
Scope of the Arbitration Clause
In each cases, the first question for the court considered was whether the relevant arbitration clause applied to the claim being brought by the pursuers/petitioners. The second question was whether, even if the clause did apply, the defender/respondent had "taken any step in the proceedings " which meant that it had lost the right to rely on the arbitration clause.
The arbitration clause in the Morton case was in the following terms:-
“All questions, disputes or differences as to the true intent and meaning of these Rules or as to the execution of the trusts of the Scheme shall be submitted to a sole arbitrator to be mutually agreed upon, or, failing agreement, to be nominated by the Court, and the decision of such arbitrator shall be final and conclusive.”
Lord Braid identified that he was required to interpret this clause and whether the parties intended that it should apply to a claim for unpaid contributions. In considering that question, he was required to look at the source of the payment obligation, being a schedule prepared by the trustees setting out the contributions payable by the defender. The trustees argued that this schedule constituted a freestanding obligation which could be enforced without reference to the trust deed, and to which the arbitration clause therefore did not apply. In contrast, the defender argued that the obligation to make payment derived only from the trust deed, and therefore must be subject to the arbitration clause.
Lord Braid preferred the trustees' argument that it was a free-standing obligation. In particular, he was persuaded that the clause was drafted so as to apply to certain specific types of dispute, namely:- (a) disputes as to the intent and meaning of the Rules, or (b) disputes as to the execution of the trusts. The necessary implication of this was that if a dispute did not meet those fit those descriptions, the arbitration clause would not apply. Therefore, he concluded that the parties did not intend the arbitration clause to apply to an action by the trustee for payment of the contributions set out in the schedule.
In contrast, in the Hearts case, it was argued by the clubs that the nature of the dispute (i.e. a claim based on unfair prejudice) meant it was not suitable for determination by arbitration and also that the dispute was not a "Football Dispute" such as to bring it within the scope of the arbitration clause in the SFA's articles. However, following the English Court of Appeal's decision in Fulham Football Club (1987) Limited v Richards, Lord Clark held that unfair prejudice is a matter which can be determined by arbitration, and that issues of relegation and promotion arose out of or at the very least are related to “Association Football" and so could be said to be a "Football Dispute". He was therefore required by Section 10 to sist the proceedings.
There was an attempt by the clubs to argue that the arbitration agreement was incapable of being performed due to the need to for the arbitration procedure to determine the matter before the start of the football season which at that time was less than a month away. If that argument was accepted, it would have given a basis for refusing to grant the sist. However, despite the obvious challenges in relation to timing, these were not sufficient to suggest that the arbitration agreement was incapable of being performed. The SPFL and the clubs opposing the sist each submitted that there was no reason why the matter could not be dealt with in arbitration before the start of the season.
In contrast, in the Morton case when the defender argued that arbitration was a means by which disputes could be resolved more expeditiously than in the commercial court of the Court of Session, Lord Braid noted that while arbitration is often perceived to be a quicker process that is not invariably the case as there can be "greater scope for a recalcitrant debtor to delay matters, for example, by dragging its heels in relation to the appointment of an arbiter, to take but one obvious example."
Taken any step in the legal proceedings
In both cases, the court also considered the second question i.e. whether the party making the application had taken any steps in the legal proceedings that resulted in that party losing its right to rely on the arbitration clause.
In the Morton case, the defender lodged defences on 7 September 2021, setting out its substantive defence to the action. A joint statement of issues was also prepared and lodged with the court on 17 September 2021 with no mention of the arbitration plea. It was not until 21 September that amended defences were allowed which introduced the arbitration plea for the first time.
Lord Braid was prepared to adopt the more purposive approach followed by Lord Clark in the Hearts case, where it was held that any step taken which was subject to a clear qualification that a sist for arbitration was requested was enough to avoid the loss of a right to rely on the arbitration clause. This followed the approach of the English Courts in applications under Section 9 of the Arbitration Act 1996, whereby a party will not be deprived of its right to recourse to arbitration if it takes some other substantive step in the proceedings at the same time as applying for a stay. That approach was recently approved in the case of The Deposit Guarantee Fund for Individuals v Bank Frick & C AG handed down last month. However, even that approach was not enough to save the defender in the Morton case as no qualification had been made by the defender either before or at the time it lodged defences on 7 September.
Lord Braid had some sympathy with the defender's Counsel who had not been provided with a copy of the trust deed containing the arbitration clause until after the defences were lodged. However, a copy of the trust deed had been provided to the defender’s English solicitors some months earlier and so there had been ample opportunity to brief the defender's Scottish legal team on the existence of the arbitration clause.
Conclusion
It is helpful to have case law on the approach of the Scottish Courts to Section 10. It is clear that the courts will carefully construe the applicable arbitration clause in determining whether legal proceedings should be sisted under Section 10.
However, the main takeaway from the two cases is that the Scottish Courts appear to be following the English Courts in relation to the question of when a party will be prevented from asking for a sist. A party wishing to invoke Section 10 needs to consider carefully what steps it takes in the legal proceedings. If it does decide to answer the substantive claim in some way, it will be vital that to qualify those answers with a clear intention to rely on the arbitration clause in the agreement in order to avoid losing the ability to do so.
Brodies lawyers have significant experience of conducting arbitrations following the rules of the major international arbitral institutions. Please get in touch with any of the team if you have questions about the issues raised in this blog or any aspect of arbitration.
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