UK: Reform Of The 1996 English Arbitration Act

On 6 September 2023, the Law Commission of England and Wales (the "Law Commission") published its long-anticipated Final Report on the Reform of the 1996 English Arbitration Act ("Final Report"), along with a helpful summary of its Final Report.

Procedural History

In March 2021, the Law Commission was tasked by the Ministry of Justice to determine whether any amendments were needed to the 1996 English Arbitration Act (the "Arbitration Act") to ensure that it remains state of the art and continues to promote England and Wales as a leading seat for international arbitrations.

The Arbitration Act applies primarily when the seat of an arbitration is in England and Wales or Northern Ireland (Section 2(1) of the Arbitration Act; see commentary on the Arbitration Act).

The Law Commission released its Final Report after reviewing the plethora of responses it received from the legal community in response to the two consultation papers it published in September 2022 (First Consultation Paper Summary; Responses to First Consultation Paper) and in March 2023 (Second Consultation Paper Summary; Responses to Second Consultation Paper).

The Final Report contains the Law Commission's conclusions and recommendations, including a draft Bill, as Appendix 4 to the Final Report (p. 174-183), with proposed amendments to the Arbitration Act.

It is now for the UK government to decide whether to implement these (or part of these) recommendations and introduce the draft Bill into the UK parliament.

Summary of Proposed Reform of the Arbitration Act

In sum, the Law Commission's recommendations towards the reform of the Arbitration Law include:

1. adding a new default rule that the governing law of the arbitration agreement is the law of the seat;
2. codifying the arbitrators' duty of disclosure of any conflicts of interest;
3. adding new provisions to strengthen arbitrators' immunity around resignation and applications for their removal;
4. introducing a provision empowering a tribunal to make an award on a summary basis;
5. clarifying that English courts have power against third parties under Section 44 of the Arbitration Act;
6. restricting challenges of the tribunal's jurisdiction under Section 67 of the Arbitration Act.

The Law Commission also considered, inter alia, that there are no compelling reasons (7.) to add a statutory rule on confidentiality and (8.) to repeal Section 69 of the Arbitration Act, which allows a party to appeal an arbitral award to the court on a point of law.

These issues are discussed in further detail below.

1. Default Rule That the Law of the Seat Shall Govern the Arbitration Agreement

The Arbitration Act is currently silent on the law applicable to the arbitration agreement.

In its Final Report, the Law Commission proposes that a new provision be added to provide that the law of the arbitration agreement is:

• the law chosen by the parties;
• where no such agreement is made, the law of the seat.

The Law Commission's proposal to make the law of the seat the default law applicable to the arbitration agreement contradicts the latest English common law position, according to which the law of the underlying contract shall, by default, govern the arbitration agreement. To explain, in Enka v Chubb [2020], the majority of the UK Supreme Court laid down a three-limb test for determining the law applicable to the arbitration agreement in English-seated arbitrations, as follows (see commentary on Enka):

• first, the law chosen by the parties;
• second, absent a choice by the parties, the law of the underlying contract;
• third, absent a choice-of-law provision in the contract, the law with which the arbitration agreement is most closely connected, which is generally the law of the seat.

There is a longstanding debate, in both practice and literature, regarding whether the law of the seat or the law of the underlying contract should govern the arbitration agreement, with convincing arguments on both sides. Proponents of the law of the seat argue that it provides a stable and predictable legal framework. By contrast, advocates for the law of the underlying contract contend that it offers greater flexibility and promotes party autonomy.

Adding to this debate, the Law Commission considered that Enka has been criticized as complex and unpredictable. The Law Commission aptly explains that the effect of Enka would be that many arbitration agreements would be governed by foreign law (under the second limb of the Enka rule, i.e., the law applicable to the underlying contract) and that might be problematic, as foreign law might not be as supportive of arbitration as English law. On that basis, it concludes that the law of the seat should be preferred to promote simplicity and legal certainty, which is what commercial parties usually seek when signing international contracts and choose for their potential disputes to be resolved in English-seated arbitrations.

2. Codification of Duty of Disclosure

In its Final Report, the Law Commission also proposes the codification of the common law duty that arbitrators have to disclose any circumstances which might reasonably give rise to justifiable doubts as to their impartiality.

This is the test formulated by the UK Supreme Court in Halliburton v Chubb in 2020. The Supreme Court clarified that the duty of disclosure is a component of the arbitrator's statutory duties to "act fairly and impartially" under Section 33 of the Arbitration Act, which, in turn, "underpins the integrity of English-seated arbitrations" (para. 81 of judgment).

The proposed text of the new provision would read as follows:

It is noted that most leading arbitral rules also contain provisions imposing a continuing duty of disclosure on arbitrators (for instance, Article 5.5 of the 2020 LCIA Arbitration Rules and Articles 11.2 and 11.3 of the 2021 ICC Arbitration Rules).

Albeit not strictly necessary, codifying the arbitrators' duty of disclosure is welcome as an additional layer of clarity on this important issue.

3. Strengthening Arbitrators' Immunity Around Resignation and Applications for Removal

Section 29 of the Arbitration Act provides that an arbitrator is not liable for anything done or omitted in the discharge or purported discharge of his functions as arbitrator unless the act or omission is shown to have been in bad faith.

The Law Commission notes that despite Section 29 of the Arbitration Act, immunity can be lost in two scenarios: first, when an arbitrator resigns and second, when an arbitrator is removed by a party via an application to the court (for instance, the arbitrator might be asked to pay the legal costs associated with his or her replacement).

The Law Commission deems it important to extend the arbitrators' immunity in both cases (i.e., resignation and removal) as follows:

• by adding a new clause providing that an arbitrator incurs no liability for resignation unless the resignation is shown to be unreasonable;
• by adding a new clause providing that an arbitrator should not incur costs related to an application for his or her removal (under Section 24 of the Arbitration Act), unless the arbitrator has acted in bad faith.

The Law Commission opines that immunity is important for two main reasons, i.e.:

• first, it supports an arbitrator to make robust and impartial decisions without fear that a party will express their disappointment by suing the arbitrator;
• second, it supports the finality of the dispute resolution process by preventing a party who is disappointed with losing the arbitration from bringing further proceedings against the arbitrator.

4. Summary Disposal

In English litigation, the court may give summary judgment on an issue when it considers that a party has no real prospect of succeeding on that issue.

The Arbitration Act does not contain explicit provisions allowing for summary disposal in arbitration. Nevertheless, arbitrators arguably have an implicit power to use summary disposal under Section 33 of the Arbitration Act, which provides that arbitrators are under a duty to adopt procedures which avoid "unnecessary delay or expense".

In its Final Report, the Law Commission recommends adding a new clause to the Arbitration Act, providing that, subject to the agreement of the parties, an arbitral tribunal may, on the application of a party, issue an award on a summary basis.

The Law Commission's reasoning for such an addition is that summary disposal has the potential to resolve certain disputes more efficiently. Since this is subject to the contrary agreement of the parties, party autonomy is also preserved.

5. English Courts' Powers Against Third Parties

Section 44 of the Arbitration Act vests English courts with the power to make orders in support of arbitration (a.) for the taking of witness evidence; (b.) for the preservation of evidence; (c.) orders relating to relevant property (for instance, inspection or sampling); (d.) the sale of goods in dispute; as well as (e.) the granting of interim injunctions or the appointment of a receiver.

Because of conflicting views in the case law and continuing uncertainty, the Law Commission recommends amending Section 44 to confirm explicitly that orders thereunder can be made against third parties. This is a welcome amendment, promoting clarity and legal certainty.

6. Restricting Challenges of the Tribunal's Jurisdiction Under Section 67 of the Arbitration Act

Pursuant to Section 67 of the Arbitration Act, a party may apply to English courts to challenge the tribunal's substantive jurisdiction. Substantive jurisdiction refers to (a.) whether there is a valid arbitration agreement; (b.) whether the arbitral tribunal is properly constituted; and (c.) what matters have been submitted to arbitration in accordance with the arbitration agreement.

In Dallah v Government of Pakistan [2009], the UK Supreme Court held that any challenge before the court under Section 67 of the Arbitration Act is by way of a full rehearing. This is so even if there was a full hearing on the matter before the tribunal.

Contrary to the position in Dallah, the Law Commission is of the view that a full rehearing has the potential to cause delays and increase costs through repetition.

It thus proposes to amend the current regime as follows: where an objection has been made to the tribunal that it lacks jurisdiction, and the tribunal has ruled on its jurisdiction, then in any subsequent challenge under Section 67 of the Arbitration Act by a party who has taken part in the arbitral proceedings the court should not entertain any new grounds of objection, or any new evidence, unless it could not with reasonable diligence have been put before the tribunal and evidence will not be reheard, save in the interests of justice.

7. Confidentiality

The Arbitration Act is silent on the issue of confidentiality. Confidentiality in the context of an international arbitration refers to the non-disclosure of documents, awards and any type of information circulated in the arbitration to third parties.

In recent years, there has been a general trend towards greater transparency in international arbitration in order to enhance the credibility of arbitration. While the Law Commission considered adding a default rule on confidentiality, with a list of exceptions (for instance, to comply with the law), it decided not to.

That is because it does not think that one size fits all or that a statutory rule on confidentiality would be sufficiently comprehensive, nuanced or future-proof. This is likely an informed decision, considering that:

• confidentiality is an issue that can arguably be dealt with more efficiently by the arbitral tribunal, in a procedural order, on a case-by-case basis;

• the applicable arbitration rules may have specific provisions dealing with confidentiality. For instance, pursuant to Article 30 of the 2020 LCIA Arbitration Rules, LCIA arbitrations are confidential. Arbitrations are not by default confidential under the 2021 ICC Arbitration Rules, however, which leaves the issue of confidentiality to the will of the parties and the tribunal.

8. Appeal on Point of Law

The Law Commission also considered whether to repeal Section 69 of the Arbitration Act, which allows a party to appeal an arbitral award to the court on a point of law, but decided not to.

The reasoning provided is that Section 69 is a defensible compromise between promoting the finality of arbitral awards (by limiting appeals) and correcting blatant errors of law, which is sound. The Law Commission also stressed that the parties can also opt out of Section 69 if they so agree.

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To conclude, it is observed that, in its long-awaited Final Report, the Law Commission proposed a light (instead of a thorough) reform of the 1996 English Arbitration Act, aiming to improve the efficiency of English-seated arbitrations. In light of the broad consensus following the Law Commission's public consultations, it is anticipated that the UK government will adopt the Law Commission's recommendations and introduce the draft Bill into parliament.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.