A&O’s view on the Law Commission’s second consultation on reform of the Arbitration Act

The Law Commission issued its first consultation paper on reform of the Act in September 2022. Following a review of the many “detailed” responses that were received, the Law Commission published a second consultation paper in March 2023.

The second paper, unlike the first, is limited to three topics, where engagement from stakeholders has led to revised proposals. The remainder of the topics that were covered in the first paper will be addressed in the Law Commission’s final report. Our views on the revised proposals are summarised below.

Whilst we agree with some of the Law Commission’s revised recommendations, in some areas we take a different view, or believe that further thought is required.

The proper law of the arbitration agreement

The Law Commission has proposed that the Act should contain a new default rule that the law governing an arbitration agreement is the law of the seat of the arbitration, “unless the parties expressly agree otherwise in the arbitration agreement itself”.

In our view, this proposal is welcome. It would remove much of the complexity surrounding this area of the law since the Supreme Court’s decision in Enka v Chubb. As we have discussed previously, there are also good policy and practical arguments in favour of the proposed default rule.

However, we believe that if such a reform is to be implemented, there are several aspects of the proposal that require further consideration.

First, party agreement on the law governing an arbitration agreement may be found outside of the four corners of the arbitration agreement. For example, agreement may be contained in a governing law clause or a side letter. There is no good reason for limiting the exception to the default rule by reference to “the arbitration agreement itself”.

Second, we question whether it is necessary to restrict the exception to circumstances where parties have “expressly” agreed to a governing law. The exception should, perhaps, also cover situations where an implied agreement can be found other than by reference to the choice of law of the matrix contract. 

We say “perhaps” because there are arguments for and against this approach:

• On the one hand, limiting the exception to an express choice of law in this context could cause arbitrariness (such as if the parties intended to agree expressly but did not do so clearly). It is also inconsistent with the rest of the Act and the general English law rules on formation and construction of contracts, which view an implied agreement on a par with an express agreement.

• On the other hand, we recognise that this more nuanced approach could introduce an additional layer of complexity or uncertainty. 

As such, it may be helpful to draft the amendment to the Act by reference to what is, or is not, sufficient to amount to an implicit agreement. For example, to avoid the position adopted in Enka, it may make sense to clarify that a choice of law to govern the matrix contract will not amount to an implied agreement.

Third, further thought should be given to what the proposed new rule means for the validation principle (i.e. the principle that an interpretation that upholds the validity of a contract will be preferred over one which would render it invalid). It may, in certain circumstances, still be appropriate to have recourse to the governing law of the matrix contract or English law as the law of the forum, if recourse to the law of the seat would render the arbitration agreement invalid.

Fourth, it would be helpful to clarify whether the rule is to apply from the date that the Act is amended to any arbitration agreement, whenever concluded (as we presume to be the case), or only to arbitration agreements entered into after this date.

Jurisdictional challenges to arbitral awards

Next, the Law Commission has proposed a “softer” approach towards reforming the approach to jurisdictional challenges under s.67 of the Act.

Readers may remember that, in its first consultation paper, the Law Commission suggested that a challenge to an arbitral award on the basis that the tribunal lacks substantive jurisdiction should be by way of an appeal, not (as is currently the case) a rehearing. We disagreed with this proposal for various policy and practical reasons, although we accepted that there was scope for debate (as there had been amongst our own arbitration group).

In its second consultation paper, the Law Commission has rejected the general arguments against its proposed reform. However, it has refined that approach and jettisoned the language of “appeal” and “rehearing”. Instead, the Law Commission has developed three proposed new rules which, if implemented, are to be set out in rules of court, rather than in the Act.

The proposed new rules are that:

• first, the court will not entertain new grounds of objection or new evidence, unless even with reasonable diligence the grounds/evidence could not have been advanced/submitted before the tribunal;

• second, oral evidence will not be reheard save exceptionally in the interests of justice; and

• third, the court will only allow the challenge where the decision of the tribunal on its jurisdiction was wrong.

We take the pragmatic view that, if the existing approach is to be reformed, the revised proposal is sensible, although we suggest the following refinements.

On the first rule, we agree with the test that would apply to new grounds/evidence, although we suggest that the language of the test ought to be aligned with that contained in s.73(1) of the Act (loss of right to object).

On the second rule, it remains our view that it is best left to the courts to control the hearing of evidence in the context of a s.67 challenge as a case management matter. Accordingly, we would not limit the circumstances in which a court may rehear oral evidence to “exceptional” cases. We think that a court should be able to hear oral evidence if it is “in the interests of justice”, as this is an appropriate and flexible standard that aligns with current case law and the Civil Procedure Rules.

On the third rule, whilst we are content with the substantive standard proposed by the Law Commission, we think that the question the court must ask in a s.67 challenge is simply whether or not the tribunal has jurisdiction. Whilst the tribunal’s decision on jurisdiction offers a logical starting point for this assessment, the court should not show deference to the tribunal (as a matter of competence-competence or otherwise), but rather should decide the question of jurisdiction for itself. 

Discrimination

The subject of discrimination was raised in the first consultation paper, which proposed that the Act be amended to address discrimination in the appointment of arbitrators. In the second consultation paper, this subject has been revisited and the scope of the proposed reforms have been extended. The Law Commission has made three proposals.

First, the Law Commission has maintained its original proposal that a term in an arbitration agreement should be unenforceable if it requires an arbitrator to be appointed by reference to a protected characteristic, unless that requirement can be justified as a proportionate means of achieving a legitimate aim. But it has now proposed that it should always be deemed justified to require the appointment of an arbitrator who has a different nationality from the arbitral parties. We agree. As we have previously explained, nationality is often used as a proxy for neutrality in arbitration agreements.

Second, the Law Commission has asked whether discrimination should be generally prohibited in the context of arbitration. This question raises difficult and complex considerations, and the risk of potential intersection with the Equality Act 2010. Discrimination may be experienced at many different stages of an arbitration, in many different contexts and by different participants. If one were to seek to generally prohibit discrimination in the conduct of arbitrations, the scope and jurisdictional breadth of such reforms would need to be given careful thought.

In the absence of a more detailed proposal from the Law Commission in its second consultation paper, we take the view that a general prohibition is unlikely to be the right way to proceed. It would be preferable for any reform of the Act to be incremental, and target discrete areas where there is a material risk of discrimination and where that risk has not already been legislated against in the Act or the Equality Act. For example, discrimination in the appointment of arbitrators could potentially be legislated for by extending Part 5 of the Equality Act, which currently applies to discrimination in the instruction of barristers. However, care and thought would be required in drafting arbitration-specific discrimination provisions on to existing equality legislation.

Third, the Law Commission has asked what the remedies should be for breach of a general prohibition of discrimination. This question too was difficult to comment on, due to the very broad scope of the proposed general prohibition. In our view, an answer to this question would need to consider (among other things) the specific form of discrimination to be remedied; where jurisdiction should lie for a claim based on a breach of discrimination provisions; and whether personal jurisdiction would exist over all relevant actors (such as non-UK arbitral institutions and arbitrators). It should also be considered whether existing remedies (such as under s.24 and s.68 of the Act and the Equality Act) are sufficient without fashioning new ones.

Next steps

We look forward to continuing to engage with the Law Commission’s review process. The Law Commission is due to publish its final recommendations in the summer of 2023 and we will review, report on and engage with stakeholders on those recommendations at that time.