I wouldn't trust too much of the "history" at that Scarborough Fair page. I don't think that Martin sued Paul Simon, though he was understandably not very keen on talking about it while all the rumours were circulating. I suspect that any legal representations were between publishers or agencies rather than individuals, but I could easily be wrong. At all events, an accommodation was reached and they've made up.

Yes, you can copyright an arrangement of a traditional song; but if you have just re-arranged someone else's arrangement, so to speak, the waters become murky; and you may find yourself in a legal dispute. A lot of songs which people believe to be traditional are in fact quite complicated re-writes made from bits of traditional material and are in copyright already in that form. A lot of stuff that's been circulating since the '60s and '70s would come under that heading: Jack Orion would be one example. Quite a few songs are most commonly sung nowadays to tunes with which they were never associated in tradition: Willy of Winsbury, The Cruel Sister and Annan Water, for example, were set to other melodies from traditional sources (but in each case taken from books, not directly from tradition) by Andy Irvine, Pentangle (or someone unknown) and Nic Jones respectively. Nic Jones in particular wrote a number of new tunes for broadside texts which are blithely performed, and recorded, by people as "trad"; and the history of The Dark Island, though the tune isn't very old, is murky indeed.

I suppose that makes it more, not less, complicated, though.