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Partner Neil Newing and Associate Alasdair Marshall examine the Law Commission’s recent consultation paper regarding proposed reforms to the Arbitration Act 1996.

Neil and Alasdair’s article was published in Global Arbitration Review, 17 April 2023, and can be found here. 

On 27 March 2023, the Law Commission published a second consultation paper as part of its ongoing review of the Arbitration Act 1996. Based on feedback to its first consultation paper issued in September 2022, the Law Commission raised three issues for further consultation:

• how the proper law of an arbitration agreement should be determined, particularly in light of the 2020 Supreme Court decision in Enka v Chubb;
• an amended approach to section 67 challenges to awards on the basis of jurisdiction; and
• further proposals concerning discrimination in arbitration.

The first of these was not raised in the First Consultation Paper, but the Law Commission was prompted to include it in the Second Consultation Paper following the receipt of 31 responses flagging this as an area for reform. The second is acknowledged as a controversial area by the Law Commission and so it has re-framed its initial proposals, alongside further proposals in respect of the third issue.

We consider the Law Commission’s proposals in relation to each issue in turn.

Proper law of the arbitration agreement

The Law Commission received 31 requests that it reform how, under English law, the proper law of an arbitration agreement is determined. The controversy stems from Enka, which, in short, held that where there has been no express choice of such law, the presumption will be that the law chosen to govern the main contract applies to the arbitration agreement as well.

This approach has been subject to heavy criticism both by commentators and respondents to the first consultation paper. One such criticism, acknowledged by the Law Commission, is that the rule in Enka results in many arbitration agreements being governed by foreign law. This is because, despite providing for arbitration seated in England and Wales, international contracts are frequently governed by a foreign law. This undermines England and Wales’s efforts to be a safe, stable and attractive place for international arbitration, since many of its rules – developed to promote those goals, such as separability – are displaced.

The Law Commission notes argument in favour of Enka, such as the parties’ possible expectation that the law they have chosen to govern their contract would govern all its terms, including the arbitration clause. However, the Law Commission concluded that the arguments in favour of reform carry the day, and provisionally proposes a new rule to be added to the Act to the effect that:

“the law of the arbitration agreement is the law of the seat, unless the parties expressly agree otherwise in the arbitration agreement itself.”

That the Law Commission favoured reform is perhaps unsurprising given its overarching aim of keeping England and Wales an attractive destination for arbitration. While the decision in Enka may have been logical as an exercise under English law, it was not necessarily the right result for arbitrations seated in England and Wales. Further, the test in Enka to be applied is not entirely straightforward, creating instability and uncertainty for contracting parties as to the rules governing their arbitration.

By contrast, other arbitral destinations, such as France and Switzerland, adopt a more stable approach. In France, the law of the contract will not displace French law from applying to the arbitration agreement unless it is stated expressly and unequivocally to have that effect. Under Swiss law, an arbitration agreement will be valid if it conforms with at least one of three laws: the law chosen by the parties to govern the arbitration agreement; the law of the contract; or Swiss law.

Consequently, the arbitration agreement can be validated under Swiss law even where the law of the contract would invalidate it, thereby giving parties arbitrating in Switzerland reasonable certainty that their agreement to arbitrate will be upheld.

In our view, the Law Commission’s proposal in this respect is to be welcomed, as it will ensure that England and Wales’s rules for arbitration are not so easily displaced, parties can enjoy certainty that their agreement to arbitrate will be upheld (and on what terms) and the Act remains competitive with other arbitral destinations.

Section 67 challenges to awards on the basis that the tribunal lacked jurisdiction

Under section 67 of the 1996 Arbitration Act, a party can make an application to court challenging an arbitral award on the basis that the tribunal lacked substantive jurisdiction. Under the current law, a challenge before the court comprises a full de novo hearing of the question, and does not take into account the tribunal’s findings or decision.

The Law Commission originally proposed that the law should be changed, such that a section 67 challenge should be by way of an appeal and not a rehearing.

This was a controversial proposal, with a number of respondents arguing, inter alia, that a de novo review is an essential procedural safeguard which is necessary to ensure that the parties have consented to arbitration and to prevent the tribunal from ascribing jurisdiction to itself.

Nonetheless, the Law Commission has maintained its core view that section 67 should not result in a full re-hearing, and that some deference should be given to the tribunal. However, in light of the responses received, it considers that focus should shift away from the label of “appeal”, “review” or “rehearing”, and instead proposes that the act be amended to confer the power to make rules of court which would identify practical constraints to a challenge under section 67. It suggests these “practical constraints” should include that:

“(1) the court will not entertain any new grounds of objection, or any new evidence, unless even with reasonable diligence the grounds could not have been advanced or the evidence submitted before the tribunal;

(2) evidence will not be reheard, save exceptionally in the interests of justice;

(3) the court will allow the challenge where the decision of the tribunal on its jurisdiction was wrong.”

The Law Commission is clearly keen to ensure that the findings of the tribunal are not completely ignored in any subsequent challenge, which makes considerable sense given the time and cost that would have gone into arguing the issue before the tribunal.

Taking on board the responses, however, this amended proposal would appear to put more discretion in the hands of the court to determine whether, in exceptional cases, something more akin to a rehearing could still take place. It remains to be seen whether this will satisfy those who were concerned that all such challenges should substantively take that form.

Discrimination

In the first consultation paper, the Law Commission considered the question of discrimination in the appointment of arbitrators and proposed that terms requiring an arbitrator to be appointed by reference to a protected characteristic be unenforceable, unless that requirement can be justified as a proportionate means of achieving a legitimate aim. This provisional proposal is retained.

However, the Law Commission is re-consulting on discrimination because, in light of responses from those consulted, new topics have been identified for potential reform. The Law Commission now asks:

“(1) whether discrimination should be generally prohibited in an arbitration context; (2) what the remedies for discrimination might be; and (3) whether a standing exception be made such that it is always permissible to require an arbitrator to have a nationality different from the arbitral parties.”

Two points are particularly notable. The first is that the Law Commission, in this delicate subject area, is clearly seeking to be guided by the public – reflected by the openness of question 2. And, second, question 3 constitutes a notable acknowledgement that although discrimination should not be tolerated, in certain circumstances, what might otherwise be considered “discrimination” may be required in an arbitration context.

The Law Commission has invited responses to the second consultation paper by 22 May.