A&O’s view on the Law Commission’s final report on reform of the Arbitration Act 1996: law governing the arbitration agreement (Part 3 of 5)

Reform proposed to how the law governing an arbitration agreement is determined

The final report recommends that the Act should contain a default rule that the law governing an arbitration agreement is the law of the seat of the arbitration, absent express party agreement otherwise. This is broadly consistent with the Law Commission’s provisional proposal in its second consultation paper. 

If implemented, the Law Commission’s proposal would change the current position as set out in the Supreme Court’s decision in Enka v Chubb.  By way of reminder, in broad terms, the Supreme Court in Enka v Chubb said that, where the parties have not expressly chosen a law to govern an agreement to arbitrate but they have made an express choice of law to govern the wider (or “matrix”) contract in which the arbitration agreement sits, the law governing the matrix contract is likely to be found to be an implied choice of the law of the arbitration agreement.

The final report acknowledges that there is no conclusive argument in favour of its proposal for reform and that any approach to governing law will have its strengths and weaknesses.  However, the Law Commission’s view is that the concerns against its proposal are outweighed by the problems of the current approach and the potential gains that reform would bring. We agree. The majority of other consultees were also in favour of reforming the law in this way.

Refinement to the Law Commission’s initial proposal

There are two areas in which the Law Commission’s final proposal differs from the proposal set out in the second consultation paper. First, the Law Commission no longer suggests that any express agreement on governing law must appear in the arbitration agreement itself.  This is clearly sensible and in line with our consultation response.  If the parties have expressly chosen the law that should govern their arbitration agreement, their choice should be given effect irrespective of where that choice is set out.

Secondly, the Law Commission has proposed that the Act should specify that the new default rule will apply prospectively only.  In other words, it will not apply to arbitration agreements entered into before the new rule comes into force. Our view is that clarity as to when the rule applies is important.  Whilst we recognise that the Law Commission’s proposal to apply the law prospectively will mean that the problems of the current rule will persist for some, we agree that it is, on balance, the right approach, not least because of the difficulties that retrospective application might give rise to in relation to ongoing disputes. 

Comment

The legal arguments in favour of and against reforming the approach to determining the law governing an arbitration agreement are relatively finely balanced. In our view, however, the Law Commission has reached the right (and most practical) conclusion.  In the absence of an express choice, we agree that the law governing an arbitration agreement should be the law of the seat of arbitration.  This provides clarity to users on an issue where the Supreme Court’s decision in Enka v Chubb had provided a clear test on paper, but little clarity in practice.

Moreover, in our experience, parties have tended to negotiate for the law of the seat to govern the arbitration agreement where the seat and the governing law of the matrix contract differ.  If they fail to do so, the new rule will reflect this intention.  That said, it continues to be advisable to specify a governing law for the arbitration clause where the seat and the law of the main contract differ, if there is a risk of a court other than the English court considering the issue.

Up Next

In our fourth blog post in this series, we cover the Law Commission’s recommendations for facilitating emergency arbitrations under the Act.