Legal error challenge to arbitrator’s decision that expulsion notice served on farming partner was invalid refused permission to proceed

About this case:

• Citation:
  [2024] CSOH 83
• Judgment:
  External link
• Court:
  Court of Session Outer House
• Judge:
  Lord Sandison

The petitioners, who sought to expel a member of the partnership for assaulting another partner in 2020 and 2021, challenged an arbitrator’s decision of 14 June 2024 on the grounds of a serious irregularity in procedure, and separately legal error. The latter ground required the leave of the court to proceed under rules 69 and 70 of the Scottish Arbitration Rules, as the respondent did not agree to it.

The application was considered by Lord Sandison, with McKinlay, advocate, appearing for the petitioners and R Sutherland, advocate, for the respondent.

Not in pleadings

The parties were members of a farming partnership governed by an agreement dated 1 April 2012. Under clause 19.1 of the agreement, each partner was obliged to “be just and faithful to the other partners in all matters related to the firm” at all times, and under clause 22.1, any partner in material breach of the agreement or guilty of any conduct likely to have a material adverse effect on the partnership could be expelled by written notice.

On 8 September 2022 a notice of expulsion in terms of clause 22.1 was served by the petitioners on the respondent. The petitioners considered that service of the notice was justified by the respondent’s alleged conduct towards them, including two assaults on the first petitioner in late 2020 and early 2021.

The respondent denied engaging in any conduct falling within the ambit of clauses 19 and 22 and disputed the validity of the notice. As the terms of the partnership agreement required the resolution of disputes by arbitration, the question of the validity of the notice was referred to the arbitrator, who held an evidential hearing in May 2024 following the rules of Scottish civil court procedure.

Following completion of the factual evidence, the petitioners claimed that the respondent’s written submissions raised new lines of defence not featured in his pleadings, notably that the notice was invalid due to delay in serving it once the other partners became aware of his conduct. They submitted that they would be prejudiced if these arguments were entertained at the stage of procedure that had been reached.

While the arbitrator determined that the 2020 assault had taken place, he went on to hold that the notice of expulsion had not been issued within a reasonable time following the assaults. In relation to their legal error appeal, the petitioners submitted that in deciding the case on an issue not featured in pleadings, the arbitrator had exceeded his jurisdiction.

Inconsistent with existence

In his decision, Lord Sandison said of the relevant arbitration rules: “Rule 69 of the Scottish Arbitration Rules is a ‘default’ rule within the meaning of section 9 of the Arbitration (Scotland) Act 2010. That means that it applies to the arbitration in question only in so far as the parties have not agreed to modify or disapply it in whole or in part in relation to the arbitration. Parties are to be treated as having agreed to modify or disapply a default rule if or to the extent that it is inconsistent with or disapplied by, inter alia, the arbitration agreement.”

He explained further: “In the present case, the arbitration clause in the partnership agreement makes it clear that the arbitrator’s decision is to be ‘final and binding’ on the parties. The reference to the Administration of Justice (Scotland) Act 1972 further indicates that the parties’ intention was not to permit a case to be stated by the arbitrator for the opinion of this court on any question of law which might arise in the arbitration.”

Lord Sandison concluded: “Although the parties were not entitled to contract out of the mandatory provisions of the Rules relating to serious irregularity appeals, the stipulations made by them in clause 28 of the partnership agreement are inconsistent with the existence of a legal error appeal to this court from a decision of the arbitrator in terms of rule 69. The application in terms of that rule is accordingly incompetent.”

In a postscript explaining that he would not have granted leave even if the application had been competent, he added: “The points which the petitioners sought to place under review were matters which the arbitrator was asked to decide and their determination may substantially affect the petitioners’ rights. However, they are not points of general importance within the meaning of rule 70(c)(i). Therefore, although I might have been inclined to regard the arbitrator’s construction of clause 22.1.6, at least, as open to serious doubt, that is not the test which falls to be applied.”

Leave to appeal on the ground of legal error was therefore refused, with the case put out by order to address the petitioners’ further ground of challenge alleging serious irregularity.