[2015] CSOH 136




In the petition of





Judicial review of a purported decision by Adrianne Airlie CA as arbiter in the arbitration between the petitioners and Colin Neil McLeod, and for interdict and interdict ad interim

Petitioners:  Ellis QC;  DAC Beachcroft Scotland LLP

Respondent:  Colin Neil McLeod; Party

15 October 2015

[1]        In this petition the partners of the firm of Dallas McMillan, Solicitors, Glasgow seek the reduction of a decision of Adrianne Airlie CA, as arbiter in the arbitration between them and Colin Neil McLeod, a former partner of the firm.  They also seek interdict and interdict ad interim against Mr McLeod from taking any steps to enforce the arbiter’s decision.  Mr McLeod is the only respondent.  The arbiter has not entered appearance.

[2]        The petitioners and Mr McLeod entered into a contract of partnership on 11 April 2000.  The partnership continued until 8 February 2008 when Mr McLeod resigned.  After his resignation he claimed payment of certain sums which he contended were due to him by the continuing partners in terms of the contract.

[3]        The relevant provisions of the contract are Clauses Fourteenth and Twentieth. 

“Fourteenth:    Payments on Death, Expulsion or Retirement,


In the event of the death of any partner, or the expulsion or retirement of any partner by the operation of Clause Twelfth or Thirteenth hereof,


(a)        the whole assets (including the firm name, goodwill, work in progress, furniture, fittings and equipment, cash balances and books and records) of the partnership shall become the exclusive property of the remaining partners who shall settle the whole debts and obligations of the partnership as at the date of such death, expulsion or retirement…


(b)        a Balance Sheet shall be prepared in terms of clause Seventh hereof in which no additional value shall be placed upon the goodwill of the partnership as at the date of the death, expulsion or retirement of the outgoing partners.  The outgoing partner or his Trustee… shall be entitled to require that any asset or group of assets (other than goodwill) of the partnership be valued for the purpose of any such Balance Sheet by a valuer mutually chosen or, failing agreement to be nominated by the Arbiter after mentioned.  Such Balance Sheet shall take into account all liabilities of the partners as such for income tax to the date of death, expulsion or retirement and make due provision therefor.  The sum at credit of the Capital Account of the outgoing partner shall be ascertained from the Balance Sheet and paid by the remaining partners to the outgoing partner or his Trustee in equal amounts at intervals of six, twelve and eighteen months after the date of death, expulsion or retirement as the case may be.  In the event of death, or retirement of the outgoing partner interest shall be payable…..”


“ Twentieth:  Arbitration


All disputes and differences which may arise between the partners or between any of them and the Trustee of a former partner or the creditors of an insolvent or bankrupt partner as to the meaning, intent or construction of this Contract or the implementation hereof or any other matter in relation to the partnership or its dissolution and winding up, whether arising during the existence of the partnership or after its termination, shall be referred to an Arbiter mutually chosen or, failing agreement, to be appointed on the application of any party to any such dispute or difference by the Sheriff of Glasgow and Strathkelvin at Glasgow, and the decision of such Arbiter shall be final and binding on all concerned.  The application hereto of section 3 of the Administration of Justice (Scotland) Act 1972 is expressly excluded.”


[4]        In her report the arbiter invoked Clause Tenth of the contract.  That provision conferred the authority to make decisions on behalf of the partnership on the equity partners after consultation with the salaried partners. The remaining equity partners were the first petitioner and Mr McLeod.  The terms of the Clause were as follows:

”Tenth:    Decisions

Where any decision is required to be taken or any act is required to be consented to or authorised by or in relation to the partnership such decisions shall be taken or such acts shall be consented to or authorised by decision of the first, second and third parties who shall be bound to consult with the fourth and fifth parties.”


[5]        No interim payment of capital account has been made to Mr McLeod since arrestments totalling £254,545 have been placed on his capital account by various creditors.  In August 2009 he raised an action against the petitioners in Glasgow Sheriff Court seeking payment of £500,000, which he contended was the true balance at credit of his capital account at the date of his resignation.  He also sought interim decree for £201,569 which was the sum at credit of his capital account as brought out in draft partnership accounts prepared as at 29 February 2008.  His contention was that the discrepancy between the two figures was explained by the undervaluation of work in progress. 

[6]        The action was sisted to allow the dispute to be referred to arbitration and the parties subsequently agreed to the appointment of Miss Airlie.  She entered office in August 2009.  The arbitration commenced before the coming into force of the Arbitration (Scotland) Act 2010.  There was no deed of appointment. 

[7]        On 8 September 2009 the arbiter wrote to Mr Leslie, the first petitioner, intimating the basis on which she proposed to conduct the arbitration.  She wrote:

“Section 20 of the most recent partnership agreement provided, 11/4/2000, confirms that the decision of the arbiter will be fully binding in all partners.  The agreement is silent on the specific processes of Arbitration, hence I will apply the following common practice definition of my role:-


The arbiter in this case has the widest discretion permitted to ensure the just, expedient, economical and final determination of this dispute. 


I have therefore sole discretion to decide the means by which this arbitration shall proceed.  I intend to proceed on the basis of a mixture of written submissions, documentary evidence, hearing parties’ oral submissions individually (or collectively) formally or informally or by any other means.  I will request full access to any information I deem to be necessary to come to my conclusion and will request that from any parties I feel may have, or have an opinion on, that information.....


At this stage I would propose that costs of arbitration are shared equally by both parties, albeit that I reserve the right to amend this during or at the end of the arbitration.”


As I understand it, neither party replied to the letter and the Arbiter proceeded with the arbitration adopting the procedures which she had proposed.

[8]        The remaining issues between the parties were, (a) the value of work in progress as at 8 February 2008, Mr McLeod contending that work in progress had been undervalued;  and (b) the status of payments amounting to £200,000 made by Picsel Technologies Limited (“Picsel”) , a client company of the firm, to Mr McLeod as an individual.  The petitioners contend that that sum fell to be paid to the partnership while Mr McLeod contends that he was entitled to it absolutely. 

[9]        The arbiter issued her decision in draft on 8 August 2013, and finally in a report dated 22 October 2013.  In section 2 of the report, under the heading “Arbitration Process”, after referring to her letter of 8 September 2009, she wrote:

“Therefore the decision making in this case was surrendered to the arbiter and the approach taken by her was to be accepted by all.  She had complete freedom of choice regarding the operation of the process and the information to be provided... 


This report is the professional opinion of the arbiter in her capacity as a qualified chartered accountant and not in any other capacity.  Independent legal advice has been sought by the arbiter throughout the process and the final report has also been reviewed by an expert in valuation and other business disputes.”


[10]      In Section 4 of the Report under the heading “Specific Findings” the arbiter fixed the balance at credit of Mr McLeod’s capital account as at February 2008 at £262,207, with interest in terms of Clause Thirteenth.  In addition, she decided that the remaining partners should each execute a personal guarantee for that sum in his favour.  In Section 5 of the Report under the heading “WIP Review” she valued work in progress as at 8 February 2008 at £356,824.  

[11]      In Section 6 of the Report under the heading “Picsel Payment” she found that the £200,000 paid to Mr McLeod should have been accounted for in the partnership accounts.  The basis for this finding was the provisions of section 29(1) of the Partnership Act 1890:

“Every partner must account to the firm for any benefit derived by him without the consent of the partners from any transaction concerning the partnership, or from any use by him of the Partnership property, name or business connection.” 


In paragraph 5 of Section 6 under the heading “Conclusion” the arbiter decided that the sum should have been a capital receipt of the partnership and that it would have been for the equity partners to decide how it should have been distributed, “if different from the normal capital sharing ratios”.  Invoking Clause Tenth of the contract of partnership she then purported to exercise her discretion to divide the sum equally between the partnership and Mr McLeod personally.  She wrote:

“The arbiter concluded that this payment was linked to a client.  It was a significant receipt and represented super-profit or a windfall from that client relationship.


It is evident that the transaction was not well documented, but the arbiter then considered that had it been, how would she have expected it to have been treated?   This was considered in the light of the actual DM partnership agreement and general best practice principals of how a partnership should work.


In this case the arbiter decided that this amount should have been a capital receipt of the partnership.  It would then be for the equity partners at that stage to decide how it should have been distributed, if different from the normal capital sharing ratios.  The DM partnership agreement is silent about varying rate of profit shares, both capital and revenue.  However section 10 of the partnership agreement offers discretion that the partners could take any decision that needed to be made.


In view of the circumstances of this case and the significant effort of CM in handling Picsel the arbiter has decided that the split of that capital receipt in the partnership would have been fair as 50% to CM and 50% to the partnership…....


......Therefore in this instance, in the absence of clear evidence, I cannot conclude categorically that the payment received by CM is totally personal to him, nor totally partnership income.  I therefore have to accept that the payment should be split in some way between the firm of DM and CM.  However this should be done within the partnership rather than outwith and consideration given to an additional allocation of funds to CM.”  


[12]      In appendix 7 to the Report the arbiter indicated that the work in progress had been valued by her firm and that they had sought and obtained data from the Law Society of England and Wales indicating average levels of work in progress for solicitors firms in those countries.  That data, it was said, was used to provide additional assurance that the firm’s calculations for work in progress were reasonable. 


[13]      In relation to the arbiter’s valuation of work in progress Mr Ellis QC, for the petitioners, challenged her report on three counts.  Firstly, he argued that she had taken it upon herself to value work in progress and so had acted ultra vires.  Clause Fourteenth of the contract required that the revaluation of assets should be carried out by a valuer chosen either by the agreement of the parties or nominated by the arbiter.  Secondly, in arriving at the valuation she had used outside information, in the form of data from the Law Society of England and Wales, without informing the parties that she was either seeking or relying on it.  Thirdly, she took advice from others, including legal advice and advice from an expert in valuation, without informing the parties of the identity of the expert, the topic on which his advice was being sought, or the nature of the advice given.  In doing so and in using the data from the Law Society of England and Wales, the arbiter acted contrary to natural justice.  Reference was made to Field & Allan Lownie 1909 2 SLT 317, Black John Williamson Co (Wishaw) Ltd 1923 SC 510 and Costain Ltd Strathclyde Builders Ltd 2004 SLT 102 and Highlands & Islands Airports Ltd Shetland Islands Council 2002 [CSOH] 12. 

[14]      In relation to the payment from Picsel to Mr McLeod, Mr Ellis argued that the only issue the arbiter had to decide was whether or not that payment was due to the partnership, but it was unclear what she had decided on that question.  She had concluded that the payment was due to the partnership but she had contradicted that by splitting the payment between the petitioners and Mr McLeod.  The lack of clarity meant that she had failed to exhaust her remit.  The parties were given no notice of this outcome and no evidence was taken in relation to a division of the payment.  Moreover, the arbiter had misunderstood the meaning and purpose of Clause Tenth.  Its purpose was to determine on whom, among the partners, the power of decision making rested in relation to the conduct of the business of the partnership.  It did not confer any power on the arbiter and so the decision which she purported to make on the basis of it was ultra vires. 

[15]      In relation to the arbiter’s order that the petitioners should each produce a personal guarantee in favour of Mr McLeod, Mr Ellis argued that in making such an order the arbiter was again acting ultra vires.  There was nothing in the contract of partnership which imposed such an obligation on the petitioners, and nothing in the arbiter’s appointment which gave her such power. 

[16]      In relation to the arbiter’s statement that her decision was “the professional opinion of the arbiter in her capacity as a qualified chartered accountant and not in any other capacity”, Mr Ellis argued that she had accepted appointment as an arbiter in terms of Clause Twentieth of the contract of partnership and so was governed by the whole terms of the contract and the general law of arbitration.  She was therefore bound to act in a quasi‑judicial manner within the powers conferred on her.  It was not open to her to act “as a qualified chartered accountant and not in any other capacity”.  She had misunderstood the nature of her appointment and so had acted ultra vires. 

[17]      Mr Ellis argued finally that in the course of the arbitration the arbiter had developed a financial interest in the outcome.  In her letter of 8 September 2009 accepting appointment she proposed that the costs of arbitration would be shared equally by both parties.  She had acquired a personal financial interest in the following circumstances.  She was aware of the arrestments for £254,545 placed on Mr McLeod’s capital account.  Mr McLeod was impecunious and in receipt of state benefits.  If the award to him was ultimately greater than the sum arrested he would be in a position to pay a share in the arbiter’s costs.  If the award was lower than the sum arrested he would not. Accordingly, so the argument ran, there was a perception that it might be in the arbiter’s interests to make a higher award.  

[18]      Mr McLeod who appeared on his own behalf offered no argument in direct response to the petitioners’ submissions.  He explained that he had retired from Dallas McMillan on grounds of ill health and was now unable to work and in receipt of employment support allowance.  While he was a partner he had acted as solicitor to Picsel and earned about £250,000 in fees for the firm.  He was also a director of the company and worked for them in that capacity.  He was in the habit of going to their office at 6.00am and working there until he left to commence work at Dallas McMillan’s office at 9.00am.  In his capacity as director he established a share option scheme under which he himself was offered an option.  He opted to take a cash sum and was given a cheque for £200,000 drawn in his favour.  He informed the first petitioner that he had received this sum.  Of it, £135,000 was placed in Dallas McMillan’s account and used as part of a deposit for the purchase of Dallas McMillan’s office.  The balance was used to pay off personal debts of his own. 

[19]      He submitted that the appointment of the arbiter superseded the provisions of the partnership agreement in relation to procedural matters and valuation of work in progress.  The arbiter had a wide discretion.  Once she had issued her draft decision both parties had had an opportunity to enquire who had valued the work in progress and to question how the sum was arrived at.  The petitioners had not made any representations and so had acquiesced in the arbiter’s actings. 

[20]      As to the arrestments in the hands of the petitioners, he explained that the principal arrestment was for £150,000 at the instance of his second wife. The remainder might be a result of a mandate he had signed in relation to arrestments following on other decrees against him.  It was ludicrous to suggest that the arbiter might be influenced by the mechanics of payment by him. 

[21]      Mr McLeod rejected the petitioner’s arguments in relation to natural justice and the competence of the arbiter’s actings and opposed the granting of interdict.  He sought expenses against the petitioners.


[22]      It is unfortunate that I did not have the benefit of a detailed response to the arguments advanced by Mr Ellis.  There may have been arguments available to the arbiter and to Mr McLeod which have not been explored. 

[23]      In her letter of 8 September 2009 the arbiter noted that the contract of partnership was silent on the specific processes of arbitration and she set out the processes which she intended to employ in carrying out her task.  She was perfectly entitled to do that, just as she was entitled to choose the various processes which she set out.  She also set out what she described as the common practice definition of her role: 

“The arbiter in this case has the widest discretion permitted to ensure the just, expedient, economical and final determination of this dispute.”


In the absence of a response from the partners they must be taken to have accepted the terms which the arbiter set out. 

[23]      The question then arises as to the effect, if any, of the arbiter’s letter on the legal framework on which her appointment was based.  In my view the letter contained no statement which was capable of being interpreted as departing from or superseding the provisions of the contract.  The letter related solely to the procedures the arbiter intended to employ.  The discretion which she conferred on herself was “the widest discretion permitted”.  That phrase is in no way inconsistent with the terms of the contract.  The use of the word “permitted” is most readily understood as meaning “permitted by the provisions of the contract and the general law”.  Accordingly the law governing the powers and duties of the arbiter is to be found in the contract of partnership and in the general law of arbitration.  The law of arbitration requires the arbiter to adhere to the principles of natural justice and to give both sides a fair opportunity to present their cases. 

[24]      Clause Twentieth talks about referring “disputes and differences” to an arbiter.  In this case, the arbiter identifies the two disputes referred to her as, (a) the valuation of work in progress, and (b) the treatment of the Picsel payment.  Her jurisdiction was therefore confined to those disputes. 

[25]      I deal first with Mr Ellis’s submissions on behalf of the petitioner in relation to the valuation of work in progress.  Clause Fourteenth provides that on the retirement of a partner a balance sheet is to be prepared and that the outgoing partner is entitled to require any asset of the partnership to be valued for the purpose of the balance sheet by a valuer mutually chosen or, failing agreement, to be nominated by the arbiter.  The arbiter makes reference to this provision in her executive summary and in the section of her report headed “WIP Review”, so it seems clear that she understood Mr McLeod to be invoking Clause Fourteenth (b) in relation to the valuation of work in progress.  But it appears from Appendix 7 to her report that work in progress was valued by the arbiter’s firm (presumably under her supervision) but she gave no indication that the partners of Dallas McMillan had been given the opportunity to make a mutual choice of valuer.  Accordingly the work in progress was not valued according to the provisions of Clause Fourteenth and the arbiter must be held to have acted ultra vires in this regard.

[26]      Mr Ellis argued that the arbiter had acted contrary to natural justice by obtaining data from the Law Society of England and Wales and by taking legal advice and advice from and expert in valuation.  In relation to the data from the Law Society of England and Wales the arbiter says at appendix 6 to her report that the Law Society data was not used to calculate the work in progress figure, but was used solely to provide additional assurance of the reasonableness of the figure arrived at.

[27]      In Black v John Williams & Co (Wishaw) Ltd 1923 SC 510 , at page 514, Lord President Clyde highlighted the difficulty faced by arbiters who, on the one hand, have the freedom to dispense with formal court procedure but, on the other, are nevertheless bound to fulfil all the requirements of justice resting on a court of law. He said:

“It follows that, with regard to the duties of an arbiter in the conduct of a submission, including a matter so important as that of hearing witnesses, it is impossible to lay down absolute or universal general rules, breach of which by an arbiter will necessarily make his award invalid.  The question must be one of circumstances;  and the test to be applied is whether the proceedings were truly and essentially consistent with “fair justice between man and man”, or whether, on the other hand, they were such as to permit of any possibility of injustice.  I say “possibility”, because the test, owing to its very generality, must be rigorously applied.”


[28]      The arbiter’s explanation of the use made of the Law Society data was not challenged and I am content to take it pro veritate.  On that basis I take the view that since the data was not actually used in the valuation of work in progress, but was apparently considered after the decision had been made, there was no possibility of injustice arising from its consideration by the arbiter.  I therefore reject Mr Ellis’ argument on this point. 

[29]      In relation to the obtaining of legal advice and the advice of an expert in valuation, different considerations arise.  In Costain Ltd v Strathclyde Builders Ltd, Lord Drummond Young, at paragraph [22] found it impossible to draw a distinction between the obtaining of outside information by an arbiter and the obtaining of legal advice.  He held that discussions between an adjudicator and his legal advisors were not immune from the audi alteram partem principle.  In relation to the facts of that case he said at paragraph [25]: 

“Following the presentation of submissions and productions by the parties, the adjudicator indicated that he intended to discuss one particular matter with his legal adviser.  He did not state what the matter was, and is accordingly not clear whether it is a matter that was adequately covered by parties’ submissions.  If it is a matter that was not dealt with in the submissions of both parties, there will be a breach of the principles of natural justice, in that the parties were not told what the matter was and were not asked for their comments on it.  Likewise, the terms of the advice obtained from the adjudicator’s legal adviser are not known.  If, however, that advice included matters that were not adequately dealt with in the parties’ submissions, there will be a breach of the principles of natural justice because the advice was not made known to the parties and they were not asked for their comments.  Such comments might have been highly material.  For example, the request for advice might have proceeded on a misunderstanding of the facts, or the advice itself might contain mistaken information about the relevant law, or might itself involve a misunderstanding of the facts.  Any such mistake in understanding might have been corrected had the parties’ comments been called for.  At the very least, the parties’ comments might have affected the adjudicator’s ultimate evaluation of the issues before him.  In either event, there is a possibility of prejudice to the parties.  It is possible, of course, that no new matters were covered in either the request for advice or the advice itself, and that there was accordingly no actual prejudice to either party.  Nevertheless on the basis of the principles discussed in the last paragraph I am of the opinion that it is immaterial that no actual prejudice has been demonstrated;  the mere possibility of prejudice is sufficient.”


There was no indication in the arbiter’s letter of 8 September 2009 during the cause of the arbitration that she intended to take legal advice.  Nor was there an indication of the subject matter on which, or the identity of the person from whom, advice was to be sought.  In these circumstances, for the reasons set out by Lord Drummond Young, if she did take legal advice she required to give the parties an opportunity to comment on the advice given and the basis of fact on which it was sought. 

[30]      I consider that the same principle applies to the arbiter’s decision to obtain advice from an expert in valuation.  There was no provision in the contract for such a course and there again no mention was made of such a possibility in the arbiter’s letter of 8 September 2009.  Accordingly I take the view on the arguments presented to me, that the arbiter acted contrary to natural justice in obtaining legal advice and advice from an expert in valuation without informing the parties. 

[31]      The arbiter ordered that the petitioners should each grant a personal guarantee for the sum which she determined should stand at credit of Mr McLeod’s capital account.  Mr Ellis argued that in doing so she acted ultra vires.  I consider that that submission is well founded.  The contract made no provision for the granting of personal guarantees to a retiring partner by the continuing partners.  The arbiter gave no indication that such an order was a likely outcome of her deliberations, and the parties had no opportunity to make representations on it.  In these circumstances the order was clearly ultra vires. 

[32]      In relation to the arbiter’s treatment of the Picsel payment the dispute remitted to her was whether the payment was due to the partnership or to Mr McLeod alone.  In her report she clearly decided that the sum was a capital receipt of the partnership and should have been accounted for in the partnership accounts.  She however went on to decide that the fair outcome was to divide the £200,000 equally between the petitioners on the one hand and Mr McLeod on the other.  The arbiter purported to invoke Clause Tenth.  The purpose of that Clause was to lay down the decision making process which was to operate among the partners during the currency of the partnership.  The equity partners had the right to make all the decisions but were bound to consult the salaried partners.  That clause had no application to the arbiter’s function and accordingly the decision that she purported to base upon on it was not one that was open to her to make.  It was therefore ultra vires. 

[33]      Mr Ellis also argued that it was unclear what the arbiter’s decision was in relation to the Picsel payment and the arbiter had accordingly failed to exhaust her remit in that regard.  I do not consider that to be a correct interpretation of her decision.  She made a clear decision as to how the payment should be treated in the accounts and accordingly in my opinion she fulfilled her remit in relation to the Piscel payment.  As I have already indicated she however proceeded to go beyond her powers in dividing the sum equally between the parties. 

[34]      In concluding section 2 of her report the arbiter said:  “This report is the professional opinion of the arbiter in her capacity as a qualified chartered account and not in any other capacity.”  That statement reveals a misunderstanding of the role which the arbiter took on when she accepted appointment.  As I have already pointed out, in accepting appointment she submitted herself to the provisions of the contract of partnership and the general law of arbitration.  In this connection the opinion of Lord President Clyde in Mitchell-Gill v Buchan 1921 SC 390 at 395, although strongly worded, is instructive,

“When it is said that an arbiter in Scotland is the final judge of both fact and law, it is not implied that he is entitled either to make the facts as he would like them to be, or to make the law what he thinks it ought to be.  Like any other judge, he must take the facts as they are presented to him, and the law as it is.  Otherwise he would act, not as the parties’ judge, but as their oracle;  his function would not be judicial but arbitrary;  and his award would be given, not according to the principles of justice, but according to the caprice of personal preferences.  Like other judges of more highly specialised qualifications and experience, he may err both in interpreting the evidence before him and in applying the law to the facts which he thinks are proved;   and, he being the final judge on the subject matter of the submission, any such errors and misunderstandings into which he may innocently fall cannot be corrected.  But that is all that is meant by saying that he is the final judge of fact and law.  If it could be proved that, in arriving at his award, an arbiter had invented the facts to suit some of his own, or had fashioned the law to suit his own ideas, then, however innocent in itself might be the eccentricity which had seduced him into such a travesty of judicial conduct, his behaviour would naturally imply that justice had not been done;  he would be guilty of that which Lord Watson in Adams v Great North of Scotland Railway Co. described as misconduct;  and his award would be reduced.”


[35]      Mr Ellis’s final argument was that the arbiter had developed a financial interest in the outcome of the dispute.  An arbiter may be disqualified if he has any secret or undisclosed interest in the outcome which might affect his complete impartiality as between the parties.  In this case it cannot be said that the arbiter’s interest was undisclosed,  both parties were well aware of the existence of the arrestments which had been placed in the hands of the petitioners,  and it was no secret that Mr McLeod was in financial difficulties.  In these circumstances it was readily ascertainable by the petitioners that Mr McLeod would be unlikely to contribute to the arbiter’s costs unless his capital account was valued at a sum greater than the arrestments.  So any financial interest which the arbiter might have had in the outcome of the dispute was not secret or undisclosed.  Accordingly, I reject the petitioner’s argument on this aspect of the case. 

[36]      In respect that the arbiter has acted ultra vires and contrary to natural justice in the ways I have set out, I conclude that her award falls to be reduced.