Category: News

The VAR Protocol says “The referee`s original decision will not be changed unless there was a ‘clear and obvious error’”. Scottish arbitrators have a similar rule. Statutory rule 70(3)(c) in the Arbitration (Scotland) Act 2010 provides that leave to challenge (appeal) an award on the grounds of legal error by the arbitrator will only be granted if the arbitrator(s)’ decision was “obviously wrong” or “if of general importance, open to serious doubt”.

Since the introduction of VAR football fans across the world have marvelled (or been bemused by) changes of a referee’s decision when it appeared to be correct. Perhaps a similar optimism infused the challenge to the arbitrator’s decision that was made in Arbitration Application Number 2 of 2026 [2026] CSOH 63. If so, it proved to be unfounded.

It is – or should be – trite to say that one of the advantages of arbitration is the obtaining of a quick and final decision rather than having to resort to potentially long, costly and stressful court proceedings. Going to court does of course include one, or more, appeals. The court’s judgment in Arbitration Application Number 2 of 2026 underlines arbitration’s advantage of finality – for better or worse.

Lease notice dispute

The arbitration arose from a commercial lease. It gave the landlord a power to give notice to the tenant to reinstate the premises to the condition that it had been in before the tenant had, with the landlord’s consent, carried out works to the premises. The landlord’s solicitors sent a letter to the tenant giving notice that the tenant had breached various repairing and maintenance obligations and requiring them to carry out works set out in a schedule of dilapidations within a “reasonable” period.

The question arose whether the letter contained a valid notice to carry out reinstatement works arising from alterations carried out with the landlord’s consent. This was referred to arbitration.

The arbitrator held a “debate” hearing at which parties’ representatives made submissions. He examined the provisions of the lease and the letter. Following this hearing he issued a “determination” that the letter did not contain a valid notice under the power in question. He provided reasons.

Legal error appeal

P’s appeal was presented as a “legal error” rather than a “serious irregularity” appeal. In the language of the Arbitration (Scotland) Act “legal error” involves an assertion that the arbitrator has misunderstood or misapplied the substantive law that applies to the merits of the dispute. “Legal error” appeals are not concerned with the legal competency, unfairness or otherwise of the decision-making procedure.

The landlord’s argument was simple: applying the Scots law principles of contractual interpretation to the lease provision that gave rise to the power to require reinstatement, the notice invoked the provision. The arbitrator’s application of those principles was thus erroneous and (i) “obviously” so or (ii) open to “serious doubt”.

The court’s judgment contains a curious observation on legal error [para 23] namely that construction (interpretation) of a written contract or contractual notice were not questions of (substantive) law. This seems contrary to authority (e.g. Advocate General for Scotland v Murray Group Holdings [2015] CSIH 77 para [42] – that case involved construction of a statutory provision, but the principle applies to the private provisions of a contract equally).

Despite these observations the court found that the appeal had raised a purported legal error.

No error let alone an “obvious” one

Turning to substance of the alleged error, Lord Sandison found that the arbitrator had applied the principles of interpretation correctly. His conclusion could not be faulted. There was no error let alone an obvious one.

The landlord’s notice did not require reinstatement of consented-to works. Instead it required the removal of disrepair caused by the tenant’s alleged breach of their duties of repair and maintenance: an entirely different matter. It was not a valid exercise of the power in question.

Helpfully, Lord Sandison referred to the various glosses put by courts in the past on the word “obvious”, such as “a major intellectual aberration” or “a decision without rational explanation”. He echoed a further one which may assist those thinking of appealing in the future:

“.  . . if a decision is arguably correct, it cannot be obviously wrong”.

It’s not VAR !

Not raising a point of general importance

On this aspect of the appeal, the landlord tried to take advantage of the lower “open to serious doubt” test that applies if the legal point is one of “general importance”. Behind this avenue lies the idea that if the legal point is one that could be applied in many other similar fact situations, the court should decide it even if the arbitrator’s decision was not “obviously wrong” provided that his decision was “open to serious doubt”.

It was suggested that the application of the principles of interpretation gave rise to a point of general importance. Lord Sandison gave this short shrift: this was a case on its own facts. No point of general importance had been raised. Leave to appeal (challenge) was refused.

Observations:

Firstly as noted in Dundas and Bartos on the Arbitration (Scotland) Act 2010 (2^nd edn), the “obviously wrong” test sets a high bar, which will seldom be reached. If a decision is arguably correct, it cannot be “obviously” wrong.

Logically, though, it’s best to begin with the question “Is the arbitrator’s application of the law on the merits open to serious doubt?”. If the answer is “no”, then on no view can it be “obviously wrong”, given that Parliament intended the “serious doubt” hurdle to be lower.

Secondly, Lord Sandison confirmed the approach to the validity of contractual notices: you interpret and the requirements for the notice and then apply them to see if, objectively and reasonably read, the written document complies.

Finally, with regard to arbitral practice, the award appears to have been made on assumed facts without an evidential hearing. That can be an option for an arbitrator. What was odd, was the landlord’s request to the court, if successful, to send the case to a “proof before answer” – in other words an evidential hearing. If background evidence is necessary to assist in the interpretation of the lease or the notice, then it should be obtained before the arbitrator’s decision and not after.

Modern housing developments and in particular the management of or ownership within, blocks of flats often have arbitration agreements. One such was the background in the most recent Scottish court decision on arbitration: Arbitration Application Number 1 of 2026 [2026] CSOH 46.

The reason for arbitration in flatted developments is to allow the owners to obtain a quick and final decision rather than having to become embroiled in potentially very long, costly and stressful court proceedings. As Number 1 of 2026 shows, however, “quick and final” means just that: once the decision is made it’s over. An appeal is exceptionally difficult.

Tenement dispute

The arbitration concerned the ownership of “volume located in a residential building”. Volume of what? one might ask. While it’s not absolutely clear from the court’s decision it seems to have been the airspace of a commonly used passage (stair?) which passed adjacent to a flat owned by one party and a higher flat owned by the other party.

The parties, P and R, agreed on 3 questions for the arbitrator, namely:

(1) is P the sole owner of second floor part of the volume?

(2) is P the co-owner of that part? And if so with whom?

(3) if the answer to (1) or (2) is “yes”, has R encroached on the volume?

The arbitrator examined the parties’ title deeds and title sheet and interpreted them. In his award he answered question (1) “No”, question (2) “No”, and question (3) “No”.

P sought leave (permission) to make a legal error appeal, claiming that the arbitrator had erred on a point of Scots law. P argued:

(a) the decisions to questions (1) and (3) were contradictory

(b) the arbitrator had not given reasons as to why he rejected the caselaw that P had supplied

(c) he erred by not interpreting the title material with regard to circumstances occurring after the title had been acquired

(d) he found that section 3 of the Tenements (Scotland) Act did not allow a flat-owner to own parts of a tenement if those parts were not expressly included in the title to the flat.

Legal error appeal

P’s appeal was presented as a “legal error” rather than a “serious irregularity” appeal.

In the language of the Arbitration (Scotland) Act “legal error” involves an assertion that the arbitrator has misunderstood or misapplied the substantive law only. “Legal error” appeals are not concerned with the unfairness or otherwise of the decision-making procedure. And “legal error” appeals are available in very limited circumstances: the tribunal’s decision on the point must have been “obviously wrong” or, if the point was of general importance (beyond the dispute in question), “open to serious doubt”.

Basically, there is significant room for the arbitrator to get the law wrong. But that’s the price paid for the advantages of speed and finality that arbitration brings.

Procedure, not substantive law

The court was clear on arguments (a) and (b). The arbitrator’s decision on question (3) was unnecessary. As such it was beyond the scope of the questions actually submitted and could not invalidate the decision on question (1). Any complaint about lack of clarity of reasons on question (1) related to a breach of legal procedure. No “legal error” was even raised.

No error let alone an “obvious” one

Turning to argument (c) the arbitrator’s application of the substantive law of interpreting legal documents in his exclusion of post-wording circumstances was not erroneous, let alone obviously erroneous. Argument (c) was rejected.

Unfortunately, without seeing the award, the court’s reasoning on argument (d) is unclear. It does not seem to meet the argument – at least as set out in the court’s judgment. However the court did find that the arbitrator applied substantive property law correctly in disregarding a prior sasine title when deciding whether the space was included expressly in the current land-registered title: again there was no obvious error.  Leave (permission) to appeal was refused.

Observations:

Firstly the case reminds us that in Scottish arbitration-speak, “legal error” covers less errors than “error of law” in the sense used generally by lawyers. “Error of law” takes in a court getting the law wrong in whatever respect, whether it is (a) the law of procedure or evidence or (b) substantive law such as the law of contract, property, delict or unjustified enrichment. But in Scottish arbitrations “legal error” relates only to type (b) substantive law errors.

As observed in Arbitration Application No.1 of 2013, an arbitrator’s error cannot be both a “legal error” and a (type (a)) “serious (procedural) irregularity”. A disappointed party might be advised to look through rule 68 on serious irregularity to see if the error is listed there before seeking to appeal it as a “legal error”.

Secondly, as noted in Dundas and Bartos on the Arbitration (Scotland) Act 2010 (2^nd edn), the “obviously wrong” test sets a high bar, which will seldom be reached.

Finally, with regard to arbitration practice, it was unfortunate that the arbitrator decided to answer question (3) when, given his answers to questions (1) and (2), it did not arise. Not only was that a procedural irregularity under rule 68(2)(b) (though unlikely to be “serious”), but it created a risk of muddying the waters of his reasoning for questions (1) and (2) and so casting doubt on the correctness of those decisions.

Irritancy (the Scottish equivalent of forfeiture) is often the last resort for a commercial landlord. It means finding a new tenant, having the premises cleared, running the risk of rates for a void premises and other inconveniences. But once its embarked on, it needs to be followed through consistently to court-based removal even after formal termination.  As demonstrated in 24 Drury Street Ltd v DST Prop Hold Ltd [2026] SAC (Civ) 9, not doing so can result not merely in waiver but also common-law oppression to the tenant and the failure of the whole process.

Warning notice doubts

In 24 Drury Street the tenant was in arrears of rent totalling £63k. The lease had an irritancy clause in standard terms with a 14-day period for payment after the service of a pre-irritancy warning notice. In mid-November 2020 the landlord served the warning notice. It demanded payment of £63k.

The tenant didn’t pay. Three months passed. Then in February the tenant’s solicitor queried the validity of the warning notice. The landlord’s solicitors rejected this. A week later they served the irritancy notice itself, terminating the lease. End of story, you might think.

But the landlord’s solicitors weren’t confident about the warning notice’s validity. So they served another warning notice on 22 March 2021. That too was queried. A third warning notice was served on 26 March. The arrears had mounted and the notice demanded payment of £113k stating that in the event of non-compliance “the Lease may be terminated”. It was sent with a covering letter stating that the notice was without prejudice to the validity of the first warning notice, the irritancy notice of 24 February 2021, and second warning notice.

Post-termination dealings with tenant

Oddly, there was no second irritancy notice. Instead the landlord changed the locks and boarded up the premises. In response the tenant’s principal pleaded that he would try to raise money for the rent. He obtained the money. By early July the principals of landlord and tenant spoke on the telephone with the former saying that if the £113k was paid the tenant could remain. In court the landlord denied that these conversations had taken place. Nevertheless in early July the money was paid by the tenant and accepted by the landlord.

In August emails passed between the two parties and they made arrangements for the tenant to be given new keys. These were given. The landlord’s principal told the tenant’s employee that all of the issues had been resolved, although this too was contested.

Raising of court proceedings

Again, one might think that ended matters. But no, for reasons not mentioned in the judgment, the landlord raised an action for declarator of irritancy and removing of the tenant, disputing the alleged conversations, and relying on the irritancy notice of February.

Tenant’s defence

The February irritancy notice was found to be valid but the tenant’s defences:

• the landlord had waived his right to rely on the notice; and
• that in any event to allow irritancy in these circumstances would be oppressive,

were upheld and the sheriff refused declarator and removing. The landlord appealed to the Sheriff Appeal Court arguing that the sheriff had erred in finding the conversations to have taken place and that there had been neither waiver nor oppression.

Challenge to findings of fact

The Sheriff Appeal Court rejected the challenge to the sheriff’s findings concerning the conversations. On the basis of the evidence it made a finding in fact that the tenant had relied on landlord’s assurance in the phone conversation that if payment was made it could remain.

Waiver of right to enforce

Looking to the issue of waiver, the court applied the standard test: objectively viewed, were there acts of the landlord which indicated the abandonment of the right to remove and which had been relied upon by the tenant?  It found that the telephone conversations by which the restoration was promised on payment of the sum were such acts. Waiver had been established.

Landlord’s oppressive conduct

More interestingly, the court also upheld the defence of oppression. This is rare. Applying the test of “impropriety of conduct on the part of the landlord which procures an unfair consequence on the tenant”, the court rejected a submission by the landlord that conduct after the giving of the irritancy notice was irrelevant. All conduct leading up to the landlord “seeking to exercise the right to irritate” was relevant.

The oppressive conduct began with the “without prejudice” second and third warning notices, covered the changing of the locks, the telephone calls, the acceptance of payment and ended with the permission of re-entry with an assurance that all issues had been resolved.

So where does that leave us ?       the conversations, once established as fact, were clearly indicative of waiver. However a common law defence of oppression is rarely successful: impropriety of conduct with an unfair consequence is a high test. All of the elements in 24 Drury Street are unlikely to occur again, together. Sending multiple warning notices for the avoidance of doubt, would by itself hardly quality as impropriety. Equally the mere acceptance post-termination of payment of the rent giving rise to the irritancy would not seem to qualify.

What about changing the locks – unauthorised by a court decree (a civil wrong or delict) – and then permitting re-entry ?

Old habits die hard. Some in Scottish domestic arbitration practice are no exception. One is an arbitrator’s issue of a completed draft award to the parties before making the actual award. But why having heard the parties, does an arbitrator have to go to the trouble and expense of giving them a draft decision ? Before 2010 there was a concern about clerical errors making an award challengeable. But now that’s covered by rule 58 of the statutory Scottish Arbitration Rules. There doesn’t seem to be any other reason. So why still do it ? Other jurisdictions don’t.

What’s more sharing drafts can give rise to trouble. That’s what happened in Arbitration Application No. 1 of 2025 [2026] CSOH 2.

The arbitration arose out of a commercial lease. The landlord claimed damages from the tenant for loss arising out of the tenant’s breach of their repairing obligations.

The arbitrator issued a direction requiring the parties to provide “notes” of the essential details of the dispute and matters which they required to have addressed. The landlord’s note identified as the issues the correct interpretation of the tenant’s obligations and the correct measure of its loss. The tenant’s note was in broadly similar terms. The arbitrator then directed the parties to provide written submissions on these matters. The submissions of both were directed to the correct interpretation of the tenant’s obligations. This was followed by a hearing. All seemed to be in order.

Following the hearing, the arbitrator issued a draft award. The draft was accompanied by an email inviting both parties to provide “comments or otherwise” within 14 days.

This triggered a further 10-page written submission from the tenant relating to the interpretation issue, a request that evidence be led as to the circumstances in which the lease was concluded before the decision on interpretation was made, and a challenge to the arbitrator’s proposed application of the case law on the repairing obligation. At the end there was some mention of the doctrine of mutuality of obligations (whereby one party may not perform its obligation while the other party is in breach of a corresponding obligation), together with one sentence that asserted that the landlord was not entitled to enforce the repairing obligations. It does not appear that any details of the landlord’s alleged breach were given.

The arbitrator then issued her award on the issue of interpretation and the tenant’s breach without addressing the “landlord breach” argument. The tenant appealed on the basis that this argument was an issue that had been put to her and that its non-mention was a serious irregularity.

The landlord argued that there was no irregularity as the argument should have been raised in response to her original direction to provide “notes” of the essential details. The tenant however pointed to the arbitrator’s email inviting parties to provide “comments or otherwise” on the draft without any restriction as to their scope. This had opened up a possibility for the tenant to draw her attention to a new issue for her determination. It had done so and “put” the “landlord breach” issue to her. In addition to not dealing with that issue she had also breached rule 55 of the Scottish Arbitration Rules (statutory arbitration law), which provides that if a draft award is issued, the arbitrator must consider representations “about the draft”.

The court found that there had been no serious irregularity and refused the appeal. But its reasoning is strained. It found that by the time of notification of the draft award the arbitrator “had made a decision on the matters put to her”. Plainly that could not have been the case: after all the award was a draft one. The arbitrator could still change her mind. The notification of a draft and the unrestricted scope of the comments that she invited is cogent evidence of this.

Then, the court interpreted the arbitrator’s email that supplied the draft award by finding that it was “implicit” that the invitation for “comments or otherwise” could not cover “new lines of argument or new submissions”. Thus, as the “landlord’s breach” issue was a new line of argument, the email did not open the door for the tenant to “put” it to the arbitrator and she did not breach her duty to consider all arguments “put” to her.

The court justified its interpretation of the arbitrator’s emailed direction by reference to the statutory objective of arbitration of disposing of disputes without undue delay and expense. But on the face of it the email was of very wide scope. It invited not just comments on the draft but on other matters. What were those other matters?

Finally rule 55 could not be interpreted as obliging an arbitrator to consider arguments not dealt with in the draft. Rule 55 was restricted to comments “about the draft”. If the draft did not deal with an argument, and it was put into the comments, the arbitrator had no duty to consider it. Rule 55 had not been breached.

Observations: Whatever one thinks of the result, the case highlights a number of points:

Firstly, given the arbitrator’s duty to resolve the case without undue delay, it remains unclear why a draft award was issued. Perhaps the parties asked for it. But why would they do so ? Is this just a case of following a practice that has been outdated since 2010 ?

Secondly, an arbitrator’s directions as to submissions (or “comments”) should be clear as to their scope. The court’s observation “I do not consider it surprising that the arbitrator’s email . . . does not make any stipulation as to the scope of submissions” does not take in the reality of arbitration. Parties should not be required to second-guess such an important matter. A stipulation of the scope for comment would have avoided the new “landlord breach” argument and the cost and delay of the court proceedings that followed.

As noted in Dundas and Bartos on the Arbitration (Scotland) Act 2010 (2^nd edn), the traditional rationale for the issue of draft awards, has, since the 2010 Act, ceased to exist. Is it not time to kick the draft award-habit ?

Agreeing to sell goods or services over an extended period can be difficult. What happens if the cost of the goods changes over that time ? What if the exchange rates change ? There are so many variable.

As a result buyer and seller can agree to put off agreeing a price. But that can bring its own difficulties as was illustrated in the recent case KSY Juice Blends UK Ltd v Citrusco Gmbh [2025] EWCA Civ 760 (19 June 2025).

What happened

The seller agreed to sell orange juice pulp over a 3 year period. A quantity of 1274 tonnes per annum was agreed with the invoicing price for 474 tonnes of these being €1350/tonne. For the remaining 800 tonnes the contract stated merely “800 mt at open price to be fixed latest by December of the previous year”.

No price for the 800 tonnes was ever fixed by the parties. The buyer took delivery of 400 tonnes for year 1, and 127 tonnes for year 2. Disagreements led to the seller terminating the contract meaning that none was delivered in year 3. The seller sued for damages resulting from the buyer’s refusal to take full delivery. The buyer’s defence was that agreement on the price of for the 800 tonnes was essential for the buyer to be legally obliged to take that element and as none had been agreed, they could not be obliged to take the 800 tonnes.

The seller’s response was that (1) it was an implied term at common law that if agreement couldn’t be reached the buyer would pay a reasonable or market price, or in any event (2) section 8(2) of the Sale of Goods Act 1979 provided that if the price had not been fixed or determined by the parties’ course of dealing, the buyer was obliged to pay a reasonable price.

The outcome

The English/Welsh Court of Appeal found that there was an implied term at common law of a reasonable or market price if the parties couldn’t agree. It reasoned that once parties have begun to act upon a contract courts should seek to preserve rather than destroy agreed obligations. Here it was agreed that 1274 tonnes would be taken by the buyers. Part of the price for that quantity had been agreed. There was a measure in the marketplace by which a reasonable price could be ascertained. Therefore the implied term of a reasonable price in the absence of the anticipated agreement was present. The buyer’s defence was rejected.

Thoughts

 The court’s reasoning applies to agreements other than for sale of goods – the court didn’t rely on the section 8(2) argument but instead on the common law of implied terms. The court ‘s approach was practical: the contract had been acted on, parties had agreed on the amount to be delivered and so it was reasonable to fill in the price gap.

But it’s odd – and unfortunate – that the court didn’t reference the common law test for implying terms into a contract as discussed in the 2015 UK Supreme Court Marks and Spencer v BNP Paribas Securities.

If the test in Marks and Spencer had been applied, then one wonders whether one of the criteria for implication: that at the time the contract was entered into the term was “so obvious” to a bystander that they would have been seen it as applicable without expression, would have been satisfied. After all if they’d wanted to fix a market price they they could have said so.

Lessons for advisers

 If anything the case serves as a warning: if the parties can’t agree a price or a mechanism for fixing it – and instead “kick the can down the road”, there is a risk that the court could imply a market price, just as if the contract said nothing about the price at all.

So “agree to agree” is, as ever, a risky move.

After a five-years as a Scottish Law Commissioner I’m pleased to announce the reopening of my independent arbitration practice, Bartos Arbitration.

During that time, I’ve had the opportunity to broaden my perspective and deepen my understanding of the law and practice relating to commercial leases. It’s been exciting to be able to promote changes in the law to bring it up to date and better able to serve the business community. This has been reflected in the Leases (Automatic Continuation etc) (Scotland) Bill which is currently being considered by the Scottish Parliament. I’ll write more on that in the next while.

On the arbitration side, I’ve also kept in touch with the world of arbitration. I am grateful to have been able to continue arbitrating under ABTA’s Arbitration Scheme. That covers travel disputes and I have dealt with many interesting and sometimes challenging legal and factual issues. It’s a valuable service that should be better known.

Now I return to full-time practice with renewed clarity, commitment, and a continued belief in the value of fair, efficient, and thoughtful dispute resolution.

I welcome inquiries from solicitors, institutions, and parties directly, and am open to appointment to resolve commercial as well as consumer disputes.

Even if you’ve no dispute at present, keep an eye out for posts or articles on this site. I look forward to engaging with you.

David Bartos                                                                            June 2025

“. . . On November 8, 1999, when Mr. McKnight discerned that Mr. Hutchison had withheld firm income from their partnership, he left the office space that the parties had shared and created his own firm, while Mr. Hutchison continued to practice in his new firm at the same premises.”

Yet nearly 20 years later there was the British Colombia Supreme Court issuing a judgment in McKnight v. Hutchison [2019] BCSC 944 in a long running partnership dispute.

In the latest running chapter Mr M sought :

• “equitable compensation” for breach of fiduciary duty
• Damages for alleged conversion
• Punitive damages

For Scots lawyers the case illustrates how work-in-progress can be valued at the end of a partnership. It also highlights that not all remedies available in other Commonwealth jurisdictions are available under Scots law, but that different remedies may be available.

FACTS

The law firm had 2 partners, M and H. While it was ongoing H acquired ownership of a company client of the firm, obtaining dividends from the client.

After dissolution M raised in effect a claim for count reckoning and payment with the payment being of the secret profits earned by H from the client. Those secret profits were ascertained and H was found liable to make them over to the firm in the accounting.

But that was not the end of the matter.  M also claimed that H had not accounted for unbilled work-in-progress carried out for clients on behalf of the firm and taken money for private purposes. M alleged that H had:

• breached his fiduciary duty of care to the firm to render invoices to clients for the work that he had carried out;
• breached his tortious (delictual) duty not to interfere with and convert money of the firm for his own private purposes or for those of the company client.

M sought “equitable compensation” for the failure to render invoices. He sought damages (compensation) for the interference with and conversion of the firm’s money and also penal damages.

The Supreme Court of British Colombia decided that

1. H had breached his fiduciary duty to render invoices for his unbilled work in progress;
2. as “equitable compensation” was restitutionary it would order H to  liability to pay the full amount that he had billed disregarding the 20% discount for bills that would have remained unrecovered;
3. H had committed the tort of conversion in withdrawing the firm’s funds for for personal uses and those of the company client
4. It would order H to pay into the firm’s funds the amounts which he had wrongfully converted.
5. That H should pay punitive damages.

DISCUSSION

Failure to Bill Work-in-Progress : breach of fiduciary duty ?

What will seem odd to Scots ears is to hear a failure to bill work-in-progress as a breach of fiduciary duty rather than a breach of the reasonable care that a partner, as agent for his firm, owns to his firm.

A feature of a fiduciary duty, as opposed to a duty of reasonable care, is that the former is a duty of loyalty, namely to put the interests of the principal or beneficiary (where the duty-holder is a trustee) ahead of the agent or trustee’s private interest.

The effect of a breach of fiduciary duty is therefore not the loss to the firm (or principal) but the private gainof the partner from putting his interests first (e.g. through non-disclosure of a private interest in a client as in this case).

By contrast a duty of reasonable care is a duty to take reasonable care to avoid loss to the firm. Therefore the breach of that duty gives rise to a loss to the firm (or principal) and a liability to pay damages, calculated in the usual way for contractual breaches.

Normally a failure to bill work-in-progress is a breach of a duty of reasonable care and not a breach of fiduciary duty. The effect might possibly have been to debit H with a figure representing damages net of the 20% of the amount billed which would have been a bad debt when billed timeously.

There is no “equitable compensation” available in Scots law.

Partner taking assets without consent : section 29 of the Partnership Act 1890

Equally odd to Scots ears will be the tort of “conversion”. No such delict exists under Scots law. Nevertheless as made clear in section 29 of the Partnership Act a partner who uses partnership property for his private benefit without the consent of the other partners must account for that property to the firm. The order for payment of monies taken would have been the same in Scotland.

There are of course no penal damages available under Scots law.

Without a partnership agreement keeping it alive after the death or departure of a partner, the firm dies also.

So any well-written partnership agreement keeps the firm alive and gives the continuing partners an option to buy out the share of the departing partner.

Typically such provisions provide for:

• ascertainment of the value of the share to be paid by the continuing partners
• payment of that value in instalments.

The reason for instalments is to protect the functioning of the business. That all makes sense.

But sometimes the drafting of the provisions – and parties’ attempts at compromise – go wrong.

That was the case for the farming partnership in Liddle v. Liddle  [2019] EWCA Civ 346 where the English High Court decided that the continuing partners should pay a lump sum instead of continuing instalments.

FACTS

The farm had 7 partners. The partnership agreement provided that upon the exercise of the option the firm’s accountants would prepare a balance sheet at the date of departure but with the assets (other than goodwill) being shown at their market value at departure with the value to be “agreed between” the parties and failing agreement within 2 months after the exercise of the option to be decided by a valuer acting as an expert.

The price would be paid in 40 equal quarterly payments the first to be made after 2 months after the expiry of the period for exercising the option.

If any instalment remained unpaid for more than 21 days after the due date the whole balance of the price would become payable.

One partner died in December 2011, another retired in April 2012 and a third retired in Octber 2013.  The relevant continuing partners duly exercised their options to purchase.

A dispute arose over the market value of the assets. Parties agreed that instead of accounts as at the dates of departures being made up the annual accounts nearest the departure dates would be used by the partnership accountants who would produce accounts showing assets both unrevalued and revalued.

There was delay in producing the accounts and the outgoers raised court proceedings seeking an order for implement of the payment provisions even though the amount due hadn’t yet been ascertained.

The judiciary at first instance held that the partnership accountants were not acting as experts and so their valuation was not binding under the agreement.  They also held that the dwellinghouses owned by the partnership should be valued on a vacant possession basis and that the outstanding issues including the valuation should be assessed and decided by the court.

Before the court could make the decision the continuers’ solicitors accepted the valuations suggested by the partnership accountants.

The continuers contended that the agreed sums should be paid in the 40 equal quarterly instalements and paid the sums that would have been due up to the date of agreement.

The outgoers contended that as the initial and subsequent instalments had remained unpaid for more than 21 days after the due date, the whole balance of the price had become payable.

The judge at first instance agreed with the outgoers, finding the provisions of the agreement to be clear despite the parties’ disagreement as to value. The continuers appealed to the English Court of Appeal arguing that on a proper interpretation of the agreement the liability to pay any instalment arose only upon the price being agreed and that there was no breach in payment of an instalment that would trigger the payment of the whole price.

The Court of Appeal decided that

1. the liability to pay any part of the price under the agreement only arose upon the ascertainment of the price
2. the price was ascertained at the point when the accountants (not acting as experts), issued the accounts with the price and not at the point when the continuers accepted the price in the accounts
3. no part of the price was paid within 21 days of the accountants issuing the accounts and therefore the whole price was payable by the continuers to the outgoers at once.

DISCUSSION

Suspensive conditions for payment (conditions precedent to payment)

It is not clear that the court’s reasoning would be followed in Scotland, although the result would be the same.

Upon the exercise of the options a contract of sale arose for the sale of the outgoers’ (the sellers’) rights under the partnership agreement to the continuers (the purchasers).

The price under the contract was to be ascertained as per a balance sheet prepared by a third party (the firm’s accountants) with the value of the assets to be agreed by the parties failing which determined by an expert.

The agreement made it clear that the first instalment of price was due to be paid within 2 months after the expiry of the option period and that if the instalment remained unpaid for over 21 days then the whole price would become instantly due.

It seems clear that the continuers’ obligation to pay the price was subjected to a suspensive condition that the price be ascertained in the method provided. Not only that, but the price would have to be ascertained in the method provided within 2 months of the expiry of the option period. Otherwise the first instalment could hardly become due.

Here, for whatever reason, the parties agreed to depart from that suspensive condition dispensing with both the method for ascertaining the price and also the implied time limit for ascertainment.

While they agreed, implicitly, for the court to decide the values (in the absence of their agreement) and therefore the price, they did not agree to alter the time limit upon which an instalment would become payable.

In that situation, absent a variation of the instalment provision, the default position under s.43 of Partnership Act 1890 would apply, namely that the continuers would have to pay the whole amount due to the outgoers as a debt due at the date of their departure.

Lessons

From the perspective of continuing partners it’s important to secure the payment of the outgoing partners’ share in instalments and to ensure that the suspensive conditions for their duty to pay in instalments as provided in the partnership agreement are fulfilled – and indeed fulfillable.

The payment of the first instalment should be tied to the binding ascertainment of the price and not an unrealistic timescale.

A failure to do so will result in a lump sum being made payable under the Act – with cash flow difficulties for the firm.

Arbitral Confidentiality v. Freedom of Information

Arbitration is a confidential process. Rule 26 of the statutory Scottish Arbitration Rules confirms this as the default position for Scottish-seated arbitrations.

But what if one of the parties to an arbitration is a Scottish public authority subject to the Freedom of Information (Scotland) Act 2002 ? (FOISA) ? The scope of Scottish public authorities includes companies wholly owned by the Scottish Government, local authorities and many different types of “quango”.

This issue arose in a recent case from Trinidad and Tobago which reached the Privy Council Maharaj v. Petroleum Company of Trinidad and Tobago [2019] UKPC 21.

FACTS

The state-owned petroleum company (Petrotrin) had entered into a joint venture agreement with World GTL for the construction and working of a gas to liquid plant in Trinidad. It also granted a guarantee. The agreement appears to have had within it an arbitration agreement for disputes to be decided by arbitration under the rules of the London Court of International Arbitration (“the LCIA”).

Article 30.1 of the LCIA Rules obliged the parties to keep all materials in the arbitration produced for its purpose confidential except to the extent that disclosure was not required by legal duty.

The joint venture agreement was terminated and arbitrations resulted, one of which was under the LCIA rules and where Petrotrin was successful. In the meantime legal proceedings had been raised against the former chairman of Petrotrin for negligence and breach of fiduciary duty in relation to the agreement.

After a general election and a change of Petrotrin’s Board, the former chairman was appointed to a government post and a government minister suggested that the claim against the ex-chairman would be dropped. Thereafter Petrotrin’s QC advised that the action was likely to be unsuccessful. He did so on the basis of the witness statements from B and T which had been given to Petrotrin for the purposes of the LCIA arbitration. After some months the action was abandoned.

Mr Maharaj, an opposition politician, applied to Petrotrin to obtain the witness statements of B and T relying on Trinidad’s freedom of information legislation. The Trinidad FOI legislation made such statements exempt from disclosure unless:

“in the circumstances giving access to the document is justified in the public interest having regard both to any benefit and to any damage that may arise from doing so.”

Petrotrin refused to disclose the statements founding on among other things the damage that could be done to public authorities obtaining benefit from arbitration  with the LCIA. Mr Maharaj sought leave to bring a judicial review of the refusal. This was refused on the basis that it was not even arguable that Petrotrin required to disclose. This refusal was confirmed by the Trinidad court of appeal. A further appeal to the Privy Council ensued.

The Privy Council decided that whatever test one applied for judicial review of the refusal, Mr Maharaj had a realistic prospect of success in obtaining disclosure on the basis of the public interest. It allowed his appeal observing that

the damage caused by disclosure would be mitigated by :

• The fact that confidentiality under the LCIA rules was not absolute;
• The witnesses B and T were themselves employees of Petrotrin who arguably had a duty to provide statements under their employment contracts in any event;

while the benefit in disclosure was enablement of the public :

• to understand and if appropriate criticize the decisions of Petrotrin in embarking on the joint venture and the gurantee;
• to be fully informed about the ex-chairman’s involvement in them so that his public appointment could be commented on or opposed; and
• to understand and if appropriate criticize the decisions to bring and abandon the action against the ex-chairman.

DISCUSSION

The Scottish Situation 

The outcome in Scotland would have been the same. This is because while under the Freedom of Information (Scotland) Act 2002 there is an absolute exemption from disclosure of information that would otherwise give rise to an actionable breach of confidence, under rule 26 of the statutory Scottish Arbitration Rules, where disclosure is “in the public interest” confidentiality does not apply and disclosure is not actionable.

In that respect the test under the Trinidad freedom on information case applied in the Maharaj case reflects the test of “in the public interest” under rule 26. The Maharaj case can therefore be seen as an example of the application of the “public interest” exception to confidentiality under rule 26.

Comments

The case illustrates that arbitral confidentiality may well be subordinate to freedom of information from public authorities. A public authority is unlikely to be able to evade its freedom of information duties through the medium of arbitration.

The situation in Maharaj  is quite distinct from for example confidential information supplied to the arbitration by the commercial party to the arbitration. That may well be exempted from disclosure by the public authority under freedom of information legislation and arbitral confidentiality may apply.

On a broader note, where an arbitration involves a public body, there is an inherent tension between the desire for confidentiality, principally of the commercial party in the arbitration, and the need for transparency in the activities of the public body as desired by the public. This case is an illustration of the means by which that tension may be resolved.

“. . . Those tensions boiled over in October 2013, when there was a fight between Lucy and Sarah in the milking parlour. Lucy and Stuart resigned in the following month. At the time when they left, there were about 63 cows in the dairy herd.”

So wrote the English Court of Appeal in Habberfield  v. Habberfield  [2019] EWCA Civ 890 in a farming dispute that resulted in an award of £ 1.17 million for a daughter against a mother.

A important feature of arbitration – as opposed to the courts – is the confidentiality of the dispute resolution process. Tensions in a dispute often reflect tensions that existed between the parties from before. Court proceedings have to be open to the public and publicly reported.

But is that in anyone’s interests ? A real benefit of arbitration is the confidentiality of the process that’s enshrined in rule 26 of the Scottish Arbitration Rules.

No washing of dirty linen in public. No damage to reputation. These are real benefits of the arbitration process, especially in Scotland.

So the message is : even without a written partnership agreement, dispute resolution can bring real benefits.

Appeal – delay and expense

The case was appealed up to the Court of Appeal from the judge at first instance. It took another 15 months, and goodness how much money to have the appeal heard and decided – it was unsuccessful.

Arbitration by contrast brings finality. Factual findings (e.g. who is believed) can’t be appealed at all. Legal errors (such as the one alleged in the Habberfield case) only if they are obvious blunders or raise legal issue of importance beyond the case in question.

Scots and English Business and Property Law Differences

It’s interesting to see the case decided on the basis of informal general assurances given by the deceased father to the daughter as to her taking over the farm. That’s not a safe basis for any binding transfer of a farm from one generation to another.

It’s likely the case would have been decided differently in Scotland on an entirely different legal basis with quite possibly the opposite result !

This highlights the differences between English and Scots law. It also underlines the importance of having a Scottish legal expert to decide such issues.