What if Scotland leaves the UK? Implications for international arbitration and disputes arising from independence

As the referendum on Scotland’s future looms, Herbert Smith Freehills partners Matthew Weiniger QC and Andrew Cannon and arbitration practice manager Vanessa Naish consider the potential implications of Scottish independence for international arbitration there, in England and further afield; as well as the possibility of disputes arising from the independence process itself.

This article was first published on 15 September 2014 in the Global Arbitration Review.

The "Yes" campaign and Business for Scotland have been keen to stress the potential for growth in the Scottish legal profession and, in particular, international arbitration, in the event that Scotland votes to leave the UK in the referendum on 18 September.

Scotland has a modern arbitration Act that has been described as a synthesis of the UNCITRAL Model Law and the 1996 English Arbitration Act – the Arbitration (Scotland) Act 2010.

It also has arbitration-friendly courts which provide supervision of Scottish-seated arbitrations entirely independently of the rest of the UK. The Act contains a number of provisions – including an express duty of confidentiality – which many parties electing to arbitrate may find appealing.

With the infrastructure and knowhow in place – a fully-fledged Scottish arbitration centre in Edinburgh and considerable expertise on oil and gas law as a result of the North Sea reserves – the "Yes" campaign sees a real opportunity for Scotland to thrive as a centre of international arbitration in the event of independence.

Let us assume for the purposes of this article that those living in Scotland vote for independence on Thursday. What opportunities for growth would independence present for Scottish-seated arbitration, and are the hopes that Scotland will become a thriving seat of international arbitration realistic?

And what is the potential impact of Scottish independence on the English arbitration market and the market globally?

A growth in Scottish arbitration?

If Scotland does break away from the UK, the most likely position is that the UK would be regarded as the continuing state under international law, while Scotland would be a successor state.

Assuming that this is accepted by the international community, Scotland would need to confirm its intention to be bound by international treaties that the UK had entered. Its succession to the UK’s bilateral treaties – such as bilateral investment treaties – would require the agreement of the other state, usually achieved by the exchange of notes.

To be accepted as an "arbitration-friendly" jurisdiction, Scotland would need to pursue accession of the 1958 New York Convention, the 1965 Washington (or ICSID) Convention and the 1991 Energy Charter Treaty as well as the UK’s existing BITs.

The uncertainty surrounding Scotland's membership of the European Union post-independence could provoke concern about the recognition and enforcement of European court judgments by the Scottish courts and the availability of anti-suit injunctions in support of arbitration. No doubt such uncertainty would eventually be resolved. However, until it was, growth in Scottish arbitration would be unlikely to be strong.

Once the necessary legal framework was again in place to support Scotland's position as an arbitration-friendly jurisdiction, it would still face an uphill battle. There remains a big difference between a country wanting to grow its profile as a seat of international arbitration and achieving real, tangible growth.

We are all aware of other stable, "pro-arbitration" jurisdictions – Canada and Mauritius to name but two – which are actively promoting their offering. These jurisdictions offer favourable arbitration conditions with a low cost base and are seeing some growth in international work, but success in the field is rarely immediate.

Parties to disputes and the legal profession are slow to embrace the new unless forced to do so, usually believing "the devil you know" is better. When choosing a seat of arbitration, most want to see a solid, reliable body of arbitration law and judgments on international matters. That, unfortunately, creates a vicious circle: without the case law, it’s hard for a state to get chosen as a seat; without being chosen as a seat, it won’t develop case law.

Further down the line, it’s highly possible that future oil and gas concessions agreed by the Scottish government would contain arbitration clauses requiring a Scottish seat and Scottish governing law. But given the duration of such agreements, it will be many years before the current concessions come up for renewal.

As other oil and gas-rich nations have found, parties to disputes arising from their energy industries do not always turn to local law firms. It is likely that high-value, complex disputes would still be run by international arbitration practices outside Scotland, even if Scottish counsel are brought on board to assist.

Potential for growth in Scottish arbitration certainly exists, and the active steps by the Scottish government to publicise the Scottish Arbitration Centre at the recent Commonwealth Games in Glasgow and other events will assist. However, it is likely that that growth will be slow and the benefits will not all fall to the Scottish legal community.

How would London and the wider arbitration industry fare?

Separating Scotland and the UK is unlikely to impact on the commercial arbitration industry in England. Given that the Arbitration (Scotland) Act 2010 and the English Arbitration Act 1996 operate independently, London as a seat should not be affected.

We may see more commercial contracts with arbitration clauses specifying the use of Scottish law and seats, and while some of that work may be snapped up by Scottish law firms, London firms will no doubt seek to exploit that growth where possible.

So too would international firms, perhaps working alongside local firms retained to advise on Scottish law.

We' will also most likely see some contracts between Scottish and international parties that do not specify Scotland as an arbitraton seat - instead opting for nearby established seats such as London or maybe Stockholm. Indeed, it has been suggested that some international companies might deliberately steer away from choosing a Scottish seat because of the uncertainties presented by Scotland's arbitration law, which departs from the UNCITRAL Model Law in a number of respects.

Thus the benefits of Scottish independence for arbitration specialists would extend beyond Scotland.

Disputes arising from independence?

Arbitration specialists should also consider the potential for disputes arising from the independence process itself.

Many contracts contain a material adverse change provision, activated in the event of a financial default or another “termination event”. Depending on their terms, these provisions may not be triggered by Scottish independence alone. However, there could be trigger events that arise as a consequence of independence – for example, because of a change in Scotland’s tax regime (in the rate of withholding tax, for example) that affects the contract and allows one party to terminate early.

Lack of certainty regarding an independent Scotland's currency and the potential for redenomination of Scottish domestic contracts could lead to disputes over the payment terms of the contracts or their value. Changes to the energy market may also provoke disputes. It is likely that, if Scotland became independent, the UK would no longer prioritise the purchase of Scottish energy or subsidise Scottish wind power.

Wherever there is uncertainty or change there is potential for contractual disputes and these are just a few that may arise in the wake of a “yes” vote. As for investment arbitrations, these could also ensue depending on the terms of any bilateral or multilateral investment treaties that are extended to an independent Scotland – whether brought against the country or by Scottish investors against other states. But it seems likely such arbitrations would be some years away.

A rather more open question must be whether Scottish independence would lead to investment treaty claims brought by foreign investors against the UK (what remains of it). Could the process and terms of independence be the basis of claims for breach of legitimate expectations? Only time will tell.

Yes to uncertainty?

The world will be watching Thursday's referendum with interest. For some of us, the outcome may be of great personal importance. For others, the potential for a "yes" vote presents a fascinating legal and academic challenge, with few being able to provide concrete solutions on how to disentangle the legal, fiscal and administrative functions of a historically stable and developed country.

At this stage, perhaps the only certain consequence of a "yes" vote is uncertainty – which brings growth in the arbitration market for all.

We have also produced a webinar on the international law implications of Scottish independence. To access a recording of this webinar, please contact Prudence Heidemans.

For further information, please contact Matthew Weiniger QC, Partner, Andrew Cannon, Partner, or Vanessa Naish, Arbitration Practice Manager.