International arbitration

Arbitration anonymity v accounting disclosures

Sandy Cowan Sandy Cowan

The recent decision of the Scottish Court of Session between North Lanarkshire Council (the Council) and Stewart and Shields Limited (the Case) explored the issues of confidentiality and anonymity under the Arbitration (Scotland) Act 20101. The case highlights precautions organisations should take when disclosing details of ongoing arbitration proceedings in their accounts.

An arbitration was referred to the Scottish Court of Session (the Court) on Appeal, regarding part five of an arbitrator’s award, which dealt with loss and quantification, and the Council petitioned the Court for an order prohibiting the disclosure of the identity of any party to the proceedings.

Although the decision relates to a Scottish arbitration, the principles of confidentiality and anonymity apply in all arbitrations, whether UK domestic or international, and may form part of the reason why parties prefer to enter arbitration instead of litigation proceedings. Arbitrating and keeping decisions out of the public domain is considered an economic benefit compared to litigation. It prevents unwanted publicity brought upon the parties involved, who often want to work together in the future and want the disputed matter brought to a swift resolution.

In this case, the respondent opposed the motion on several grounds including:

(i) the fact that reference has been made to this arbitration in the notes to the financial accounts of the petitioner, and
(ii) that a prohibition on its being able to refer to the outcome of the arbitration would be prejudicial to its commercial interests.

Should annual accounts unmask an arbitration opponent?

In this case, the arbitrator had found in favour of the respondent on four out of five parts. These parts were no longer challengeable and as a result, the Council made a provision in its annual accounts, and disclosure as follows:

“Arbitration proceedings between the Council and Stewart and Shields Limited, for construction of the Antonine Day Care Centre which took place within the 2015/16 financial year found in favour of the contractor [i.e. the respondent] due to the Council not being entitled to terminate the contractor’s employment. The above provision has been made in the accounts on a best estimate basis for claims quantified to date by the above parties.”

There was also a second passage in the annual accounts in relation to contingent liabilities2, which stated:

“Arbitration proceedings between the Council and Stewart and Shields Limited, for construction of the Antonine Day Care Centre has found in favour of the contractor [i.e. the respondent] due to the Council not being entitled to terminate the contractor’s employment. A provision has been made in the accounts on a best estimate basis for claims quantified to date by the above parties. Four heads of claim with regards sums that may be claimed are yet to be quantified. Due to the wide variety and nature of the claims and the uncertainty of any potential liability, no value has been attributed to these claims in the financial statements.”

The annual accounts provided detailed information which disclosed the names of the parties involved in the arbitration and the work to which the contract related. In the event, counsel for North Lanarkshire Council candidly accepted that the petitioner might proceed differently in its statutory accounts in future, in respect of the amount of detail that should be disclosed in its statutory accounts about such disputes.

Conclusion

This case focused on a specific motion under Section 15 of the Arbitration (Scotland) Act 2010, but it serves as a useful reminder for all parties involved in arbitrations nationally or internationally. Accounting standards state that an organisation must disclose details of probable cash outflows, but they also allow for some discretion in relation to the extent of the details, if doing so would result in the entity prejudicing their position in arbitration proceedings3.

 As counsel for the respondent, Mr Howie QC states, “a breach of confidentiality, like cracking an egg, can only be done once. Once confidential information is disclosed, it is no longer confidential. It cannot be undisclosed.”

For further information, please contact,Robert Soady.

References:

  1. North Lanarkshire Council v Stewart and Shields Limited [2017] CSOH 76
  2. Possible obligations and present obligations that are not probable or not reliably measurable
  3. International Accounting Standard (IAS) 37- Provisions, Contingent Liabilities and Contingent Assets, allows the non-disclosure of information about provisions and contingent liabilities where disclosure is expected to prejudice the position of an entity in a dispute. In these cases, IAS 37 requires only that the general nature of the dispute is disclosed.