Arbitration Act 1996: Law Commission recommends limited changes

After an extended period of review and consultation, which began in January 2022, on 6 September 2023, the Law Commission (the Commission) issued its final report containing its conclusions and recommendations in relation to the Arbitration Act 1996 (1996 Act). The 189-page report also includes within its appendices a draft Bill to enact its recommended changes, as well as an explanatory note. A summary of the final report is also available.

The Commission notes the consensus that the 1996 Act works well and so has sensibly refrained from any radical revisions (see below “Unchanged topics”). Nonetheless, many of its proposed changes are significant. It is for the government now to decide whether to implement the recommendations, in whole or in part, and to decide whether the draft Bill should be introduced into Parliament.

Codification of disclosure duty

The 1996 Act does not impose a duty on arbitrators to disclose any connections that they have with the parties, unlike for example the UNCITRAL (United Nations Commission on International Trade Law) Model Law. However, the Commission noted that there is a common law duty of disclosure, which arises from the Supreme Court’s decision that arbitrators have a duty to disclose any circumstances that might reasonably give rise to justifiable doubts as to the arbitrator’s impartiality (Halliburton Company v Chubb Bermuda Insurance Ltd [2020] UKSC 48; see News brief “Bias in arbitration: duty to disclose appointments”).

The Commission proposes that this common law duty is incorporated by an amendment to the 1996 Act, where it will be more accessible than the current case law. The Commission also determined that the duty on the arbitrator should not only be a subjective one to disclose what they actually know, but also an objective one of what the arbitrator ought reasonably to know.
The Commission did not go so far as to include a duty of independence, such as exists in the UNCITRAL Model Law. It agreed with the drafters of the 1996 Act that impartiality is what matters most and that complete independence is often impossible.

During the consultation there were varied views on the extent of disclosure expected (see our previous Briefing “Arbitration Act 1996 reform: anything contentious?”). The 1996 Act was drafted to apply to all types of arbitration including commodity, maritime, sports and reinsurance arbitrations, where, as the Commission noted, there may be a small pool of arbitrators so that overlapping appointments are an established custom and would not need to be disclosed. However, this might not be the case in other contexts, such as commercial arbitration, where repeat appointments might give rise to justifiable doubt depending on the particular circumstances.

In terms of the impact of this recommendation if implemented, it is aimed at clarifying and codifying the existing case law, but with the ability for courts, or arbitral rules, to adapt to different situations as necessary. Therefore it should not prove controversial and should enable users to have greater confidence in the impartiality of their arbitrators.

Strengthening immunity

Under the 1996 Act, an arbitrator is not liable for anything that is done or omitted while acting as arbitrator, unless done in bad faith. The Commission recommends that this immunity be extended so that arbitrators are only liable for resigning if the resignation is proved to be unreasonable, and for the costs of applications for their removal, if the reasons for the removal arise from the arbitrator’s bad faith. This strikes a sensible balance by protecting arbitrators from disgruntled parties so that they can perform their duty without fear, while ensuring that arbitrators who behave in bad faith to the detriment of the parties can be held accountable.

Summary disposal

The Commission recommends that on the application of a party (rather than at an arbitrator’s instigation) a tribunal may make an award on a summary basis if a party has no real prospect of succeeding on that issue, according to a procedure determined by the tribunal. This would become the default position under an amended 1996 Act, in respect of which the parties could, if they so wished, either agree a different threshold or disapply entirely the tribunal’s power to issue an award on a summary basis. By referring to issues rather than claims, the Commission is making clear that this power applies to both weak claims and weak defences. This is, arguably, the most significant recommendation by the Commission, although one that was agreed with by the majority of consultees, as it enables arbitration to be as robust as the courts in saving time and cost by dismissing claims and defences that are bound to fail. If implemented it will, no doubt, be welcomed by users and practitioners alike.

Challenging awards

Currently when a party applies to court to challenge an award on the basis that the tribunal lacked jurisdiction, the court considers the application by way of a full rehearing, even if there had been a full hearing on the matter before the tribunal (Dallah Real Estate and Tourism Holding Company v Government of Pakistan [2010] UKSC 46). The Commission, however, recommends that limitations be applied to such challenges, so that the court will not entertain any new grounds of objection from those which had been considered by the tribunal, unless even with reasonable diligence it could not have been put before the tribunal, and that evidence will not be reheard save in the interests of justice.

The Commission recommends that this reform be effected through rules of court, rather than legislation, given its view that the language of the 1996 Act does not need amendment and is compatible with its recommendations, notwithstanding the different interpretative route taken in Dallah. In addition, the Commission proposes amending the law to make it clear that the right to seek the court’s preliminary determination on the jurisdiction of the arbitral tribunal under section 32 of the 1996 Act is available only as an alternative to the tribunal ruling on its jurisdiction. It proposes that this reform be achieved by amendment to the 1996 Act.

The aim of the proposed amendments is directed at preventing a defendant from wasting time and costs by having a dry run testing its arguments before the tribunal, knowing that if it loses it can run the same, and possibly additional, arguments before the English court. This issue was, along with the issue of discrimination when appointing arbitrators, the most controversial of the issues that the Commission considered, with many concerned that limiting the right of challenge in this way was unnecessary given that the existing court rules already allow a court to limit evidence and arguments if appropriate.
It is hard, however, to dispute that the proposed changes will produce a more efficient and cost-effective arbitral process, as defendants will not have “two bites of the cherry” when it comes to challenging the jurisdiction of the tribunal. For that reason, again if implemented, they will likely be welcomed by the arbitration community.

Governing law

The question of how to identify which law governs an arbitration agreement has been subject to much judicial and academic discussion, particularly so in recent years, with some taking the view that it should be the same law as that of the contract as a whole, and others arguing that it should be the law of the arbitral seat.

Although initially not an issue that the Commission was proposing to cover, after receiving feedback on the first consultation, it was included as part of a second consultation round. In its final report, the Commission has recommended amending the 1996 Act to provide that the arbitration agreement is governed by the law of the seat, unless the parties expressly agree otherwise. If implemented, this is a sensible solution that still allows parties to exercise autonomy to express a different law if they so wish in their agreements to arbitrate.

Clarification of court powers

Section 44 of the 1996 Act (section 44) sets out the court’s powers to support arbitral proceedings; for example, to preserve evidence. The Commission recommends that these powers be extended so that they can be applied to third parties, such as the custodian of evidence to be preserved, with these third parties having the usual full rights of appeal if they wish to contest the order. This is a practical approach and enables courts to better support the arbitration process while giving some protection to third parties that have not submitted to the jurisdiction of the arbitrator.

As regards the support of emergency arbitrators, the Commission proposes that two options are made available:

• Where an emergency arbitrator makes an order that is ignored, that emergency arbitrator may make a peremptory order which, if still ignored, could be enforced by the court, as is the case for normal arbitrators.
• To allow matters to be addressed under section 44 by way of an application to the court.

Costs

Although not deemed a major recommendation, the Commission has also proposed that the 1996 Act be amended to provide explicitly that a tribunal is able to make an award of costs in consequence of a ruling by the tribunal or the court that the tribunal has no substantive jurisdiction. If implemented, this resolves what was often perceived as an unsatisfactory paradox by which a party, having successfully argued that a tribunal did not have jurisdiction, might be considered to be unable to recover costs since the tribunal arguably had no jurisdiction to make any such order.

Legislative improvements

The Commission consulted widely before producing its final report, and its recommendations have clearly benefited from the insights of a broad range of stakeholders (see Briefing “Arbitration Act 1996: controversial challenges and (r)evolutionary reform”). If the Commission’s recommendations are implemented, particularly the power of tribunals to resolve issues by way of summary disposal, it will result in an enhanced 1996 Act that will ensure that England and Wales continues to be an attractive arbitral seat in the future.

Richard Kiddell is a partner, and Dalal Alhouti is a knowledge development lawyer, at Charles Russell Speechlys LLP.

The final report and draft bill are available here.

Unchanged topics
For completeness, three other major topics are discussed in detail in the Law Commission’s (the Commission) final report containing its conclusions and recommendations in relation to the Arbitration Act 1996. These are confidentiality, discrimination and appeals on a point of law. However, no changes in relation to these areas are ultimately proposed. Of these, the absence of a proposed amendment in relation to discrimination is perhaps the most noteworthy, although it is understandable when considering both the Commission’s reasoning, that is, it could lead to unwarranted satellite litigation and challenges to awards, and the pragmatic approach that the Commission has taken to reform as a whole.

This article was written by Richard Kiddell, Partner, and Dalal Alhouti, Knowledge Development Lawyer for Thomas Reuters Practical Law.