The Second Law Commission's Consultation Paper on Reforming The Arbitration Act 1996

The second consultation by the Law Commission on reforms to the Arbitration Act 1996 (the Act) has just closed. The Law Commission’s consultation makes clear that no sweeping reform is needed, but considers there are a few key issues worth revisiting to ensure the Act remains state of the art (having been in place for over 25 years).

On the first consultation, my colleague Andrew Robertson has written an insightful summary: Law Commission’s Review of The Arbitration Act 1996 - infra.law Winter 2022. Here we look at the second consultation on reforms to the Act which came to an end on 22 May 2023 addressing three key issues:

1. The proper law of the arbitration agreement.
2. Challenges to awards under section 67 of the Act on the grounds that the tribunal lacked jurisdiction.
3. Discrimination (of the arbitrator) in the context of arbitration.

The proper law of the arbitration agreement

This was not considered in the first consultation (which was published in September 2022) but a large number of responses prompted the Law Commission to include it in the second consultation.

The Supreme Court decision in Enka Insaat Ve Sanayi A.S. v OOO Insurance Company Chubb [2020] UKSC 38 has prompted this discussion. 

• The Supreme Court considered the principles to determine the governing law of arbitration agreements and the decision may lead to complexities in deciding this issue. If there is an express or implied choice of law in or directed to the arbitration agreement, this should stand unless it is contrary to a public policy.
• Where this is no choice of law, the governing law of the arbitration agreement will generally be the law of the seat of arbitration chosen by the parties. The decision is significant for those who use arbitration agreements in their cross border contracts and has provided some clarity in this area however the process set out by the Court for determining the governing law is complex and may leave the door open to disagreement.

Why is the law of the arbitration agreement important? 

Generally, the arbitration agreement will be contained within the contract itself, but it can be a self-contained agreement. For domestic agreements, the law of the contract and the law of the arbitration will usually be the same.  However, for cross-border transactions, it is possible that the governing law of the arbitration agreement may be different to the governing law of underlying terms and conditions of the agreement.

If the validity or scope of the arbitrator’s decision is challenged, it will be challenged applying the law which governs the arbitration agreement (not the law of the underlying terms and conditions). 

The decision in Enka v Chubb could result in more arbitration agreements seated in England and Wales being governed by foreign law, which would likely mean an uptake in the requirement for foreign law experts and could lead to additional time and expense for the parties to the arbitration.  

To try and offset the issues arising where there is no choice of law of the arbitration agreement stated and the complexities in the Enka v Chubb decision, the Law Commission has suggested the introduction of a new rule in the Act confirming that the proper law of the arbitration agreement is the law of the seat (the location of where the arbitration is to take place), unless the parties expressly agree otherwise in the arbitration agreement itself.

This would apply whether or not the arbitration is seated in England and Wales or elsewhere, and whether the seat was chosen by the parties or determined by other means.

Challenging the tribunal’s jurisdiction under s67 of the Act

The Law Commission proposes a change to the rules of court which applies to challenges under section 67 of the Act as follows:

• The Court cannot permit any new grounds of objection or new evidence, unless these could not have been advanced before the tribunal even with reasonable diligence.
• Evidence should not be reheard (save exceptionally in the interests of justice).
• The challenge should only be allowed where the decision of the tribunal on its jurisdiction was wrong.

The Law Commission’s view is that the tribunal should be able to rule on its own jurisdiction and perhaps even before a court does but it is worth bearing in mind that the proposal is that any changes will be dealt with through rules of court, rather than amending the Act. In the words of the Law Commission, this is a “softer” approach to reform as they feel that the Act is already consistent with their approach. We agree that perhaps this gives a chance for the rules to be piloted and amended if needed before they are enshrined in the Act.

Discrimination of the arbitrator’s appointment

The first consultation proposed that the appointment of an arbitrator should not be open for challenge on the basis of the arbitrator’s protected characteristics and any agreement by the parties in relation to this would be unenforceable.

In light of the response, the Law Commission has asked further questions:

• Whether discrimination should be generally prohibited in an arbitration context?
• What are the remedies for discrimination?
• Should there be an exception that it is permitted to require the arbitrator to have a different nationality to the parties?

We would expect most responses to agree that discrimination should be prohibited generally in the conduct of the arbitration but perhaps there is a deemed justification to require an arbitrator to have a neutral nationality to those of the arbitral parties to avoid any potential bias.

It is encouraging to see the Law Commission running this second consultation given the importance of the topics discussed. Watch this space!