Second consultation paper on reform of the Arbitration Act 1996

See our analysis of the first consultation paper. This paper makes further proposals in three areas, namely.

• The proper law of the arbitration agreement – the Law Commission proposes that an arbitration agreement should be governed by the law of the seat of the arbitration, unless the parties expressly agree otherwise.
• Jurisdiction challenges – the Law Commission has developed its views on the limits that should be imposed on challenges under section 67 of the Act (where the challenging party has participated in an arbitration and objected to the tribunal’s jurisdiction).
• Discrimination – the Law Commission seeks consultees’ views on whether the Act should contain an express prohibition on discrimination generally and, if so, what the remedies for breach should be. The Law Commission also proposes that the Act should expressly make it permissible to require an arbitrator to have a nationality different from the parties.

These proposals are considered in more detail below.

The proper law of an arbitration agreement

The governing law of an arbitration agreement can be different from the main or “matrix” contract in which it is contained. In Enka Insaat Ve Sanayi AS v. OOO Insurance Company Chubb [2020] UKSC 38, the UK Supreme Court considered whether the law of the arbitration agreement should be aligned with that of the seat or of the main contract. The Supreme Court held that, where the parties have (expressly or impliedly) chosen the law to govern the main contract, this will be an implied choice of law to govern the arbitration agreement. However, if there is no choice of law in the main contract, and no choice of law in the arbitration agreement, the arbitration agreement is governed by the law with which it is most closely connected, which is usually the law of the seat.

As a result, in the not unusual situation of a foreign law contract providing for an English seated arbitration, the relevant foreign law will apply to disputes about the meaning and effect of the arbitration agreement (unless the parties have expressly agreed that English law is to apply). Furthermore, pursuant to section 4(5) of the Act, the effect of the implied choice of a foreign law to govern the arbitration agreement will be to disapply the non-mandatory provisions of the Act where the provision is substantive and not procedural.

Many in the arbitration community consider this to be a problematic outcome for a number of reasons. In particular:

• The combined effect of Enka and section 4(5) of the Act adds complexity and uncertainty. This is because it is not always obvious whether a particular non-mandatory provision of the Act is substantive or procedural.
• If an arbitration agreement specifies an English seat but is governed by a foreign law, and the supervisory role of the English court is invoked, the parties will be required to adduce expert evidence on the foreign law that applies to the arbitration agreement. Whilst English judges are used to dealing with this, it adds an extra layer of procedure and expense.
• The effect of applying a foreign law to an arbitration agreement is to disapply a number of important “pro-arbitration” features of English law, including in the following areas.
  • Section 7 of the Act, which provides for the separability of an arbitration agreement, is a non-mandatory provision and would therefore be disapplied.
  • Arbitrability – English law takes an expansive approach to the types of dispute that can be referred to arbitration.
  • English law adopts a generous approach to the scope of an arbitration agreement, reflecting the assumption that commercial parties are likely to want all aspects of their dispute to be resolved in the same forum.
  • Confidentiality – English law recognises that arbitration is a private and confidential process (with certain limited exceptions). This remains an important reason why parties prefer arbitration to litigation in a public forum.

The Law Commission initially indicated that it did not intend to recommend that the decision in Enka should be reversed. However, after the publication of the first consultation paper, the Law Commission received a number of responses asking it to reconsider its position. The Law Commission now says that it is persuaded by the arguments outlined above. The second consultation paper, therefore, proposes that a new rule should be introduced to the Act to the effect that the law of the arbitration agreement is the law of the seat, unless the parties agree otherwise.

In our view, this is a sensible proposal. As the consultation paper says, “it has the virtues of simplicity and certainty”. Perhaps more importantly, it significantly increases the prospect that English judges will apply English law, with its “pro-arbitration” rules on matters such as separability, confidentiality, arbitrability and the scope of arbitration agreements, to disputes about the meaning and effect of an arbitration agreement. We consider that in most cases this is likely to be in line with parties’ expectations and will bolster England’s reputation as an arbitration-friendly seat.

Challenging jurisdiction under s.67 of the Act

In its first consultation paper, the Law Commission proposed that jurisdiction challenges under section 67 of the Act should be limited to a review by the court of the tribunal’s decision, where the challenging party has participated in an arbitration and had an opportunity to present its arguments to the tribunal. This was primarily because of the Law Commission’s view that the current system of having a full “de novo” rehearing before the court can add delay and cost and unfairly gives the challenging party a “second bite of the cherry”.

This proposal provoked a mixed response, with consultees expressing strong views both in favour and against. Those in favour shared the Law Commission’s concerns about the fairness of having a second fully contested hearing before the court and considered that a more limited review of the tribunal’s decision would provide sufficient protection to a party challenging the jurisdiction of the tribunal. Those against the proposal emphasised the importance of party consent to arbitration and argued that a full rehearing was an essential procedural safeguard.

In the second consultation paper, the Law Commission says that its position has now “evolved”. Rather than amending the Act, it now proposes that rules of court should be amended to impose the following limitations on a section 67 challenge.

(i) Parties should not be permitted to adduce fresh evidence or to advance new arguments that were not raised before the tribunal, unless those points could not with reasonable diligence have been made at the arbitral hearing.

(ii) Oral evidence should not be reheard by the court “save exceptionally in the interests of justice”.

(iii) The court should only overturn the tribunal’s award if it is satisfied that it is wrong. The effect of this would be to require the court to accord greater deference to the tribunal’s decision-making process, rather than to decide the issue afresh.

This is intended to be a compromise approach. However, the proposals still produce a result which looks much more like a review than a rehearing, in that they significantly limit both the material that can be put before the court and the circumstances in which the court can overturn the tribunal’s decision. This proposal will doubtless continue to divide opinion but it seems likely that the Law Commission will continue to side with those who consider having a second de novo hearing to be wasteful and unfair. That said, the language used in the proposal (for example, “save exceptionally in the interests of justice”) preserves a degree of flexibility and there is scope for the potentially high threshold to be interpreted differently, depending on the judge and the specific context (and also on the precise formulation of any new rules). It will be interesting to see how judges apply the new rule in practice and how the case law develops.

Discrimination

In the first consultation paper, the Law Commission recommended that discriminatory terms in an arbitration agreement relating to the appointment of an arbitrator should be unenforceable and parties should not be able to challenge the appointment of an arbitrator on the basis of that arbitrator’s “protected characteristics”.

There would be an exception where an otherwise discriminatory provision is a “proportionate means of achieving a legitimate aim”. The first consultation paper recognised that a requirement that an arbitrator has a different nationality from the parties could fall within this exception. The Law Commission now proposes to go further and explicitly to provide in the Act that it should always be deemed justified to require an arbitrator to have a nationality that is different from that of the arbitral parties. In our view, this is a sensible proposal which reflects current practice and the importance to parties of ensuring that arbitrators are (and appear to be) impartial.

After publication of the first consultation paper, the Law Commission received feedback that problems with discrimination in arbitration are wider than discriminatory terms in arbitration agreements. In view of this, the Law Commission seeks feedback on whether the Act should contain a general prohibition on discrimination – and on the potentially more difficult question of what the remedies for breach should be if this wider prohibition is introduced. Clearly any proposal, which fulfils the undoubted need to improve diversity in arbitration, merits serious consideration. However, we anticipate that consultees will query whether the wider proposal will provide a sufficiently clear and workable way to achieve that important goal.

Comment

The main theme that emerged from the Law Commission’s first consultation paper was that the Act is working well and that “root and branch” reform is not required. Most commentators and practitioners share that view. However, as is reflected by the fact that the Law Commission considered it necessary to produce a second consultation paper, some of the issues under discussion are controversial and it is likely that strong views will be expressed both against and in favour of the latest proposals. In particular, it is likely that there will be further debate about the protections afforded to parties disputing the jurisdiction of the tribunal and the extent to which the Act is the most appropriate vehicle for promoting diversity. Whatever the outcome of that debate, the overall approach has been one which instils confidence in the process, with the Law Commission taking scrupulous care to gather views from interested parties and to incorporate those views in their proposals, for example, by revisiting their position on the proper law of an arbitration agreement.

The responses of consultees to this second consultation paper will be taken along with responses to the first consultation to inform the Law Commission’s final report and recommendations which might, in appropriate cases, depart from the existing provisional proposals. We wait with interest for the final report.