Law Commission publishes Second Consultation Paper on reforming the Arbitration Act 1996

The Law Commission’s second consultation paper is limited to three topics for potential reform. It does not revisit all of the topics that were covered in the first consultation paper.

First and foremost, the paper addresses the proper law of the arbitration agreement. This was covered briefly in the first consultation paper but was not shortlisted for reform. The Law Commission has revisited its approach in light of strong stakeholder support for reform in this area.

The Law Commission has also taken the opportunity, with the publication of a second consultation paper, to address two further topics: (1) challenges to an arbitral tribunal’s substantive jurisdiction under s.67 of the Act; and (2) discrimination in arbitral appointments. These topics are said to have been the most controversial of the first consultation paper, and the Law Commission has fine-tuned its proposals. 

The proper law of the arbitration agreement - removing the complexity

In its first consultation paper, the Law Commission was “not yet persuaded” 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. However, faced with “new reasons in support of reform” from the responses received, in its second consultation paper the Law Commission has provisionally proposed including a new rule to this effect in the Act. This is consistent with the responses of the majority of the consultees, including the response of our firm.

In its discussion, the Law Commission has considered the potential problems and complexities generated by the Supreme Court’s decision in Enka v Chubb. It suggests that the decision would result in many more arbitration agreements seated in England & Wales being governed by foreign law. This would lead to an increased need for parties to present expert evidence before English tribunals and courts on the effect of that foreign law, which may increase the time and costs of proceedings. The decision would also oust English law on a number of important topics, including separability, arbitrability and the scope of the arbitration agreement.

The Law Commission addresses the arguments against reform in this area. One of those arguments is that parties to a contract may have an expectation that the law governing the contract will also govern the arbitration agreement contained within it. This was also the view of the Court in Enka. However, the Law Commission contends that the ability of parties to agree to an express choice of law to govern the arbitration agreement is sufficient to preserve party autonomy.

On balance, the Law Commission has provisionally concluded that the arguments in favour of reform carry the day, with the proposed reform possessing the “virtues of simplicity and certainty” when compared to the complex decision in Enka v Chubb. This will (i) ensure that parties can benefit from the pro-arbitration stance of English law on the topics of separability, arbitrability and the scope of the arbitration agreement and (ii) remove the complexity created by the decision in Enka.

Jurisdictional challenges to arbitral awards - a softer approach

As we have previously discussed, in its first consultation paper the Law Commission proposed that a challenge to an arbitral award on the basis that the tribunal lacks substantive jurisdiction under s.67 of the Act should take place by way of an appeal, not (as is currently the case) a rehearing. The reaction from consultees was strongly both for and against this proposal. In its second consultation paper, the Law Commission has refined the proposal, jettisoning the language of “appeal” and “rehearing”, and focussing on the particular tools available to the court to delineate the limits of a jurisdictional challenge. 

The main criticism of the Law Commission’s initial proposal on reforming s.67 related to the point that, as we stated in our response to the first consultation paper, if a party finds itself in an arbitration that it never agreed to and before individuals that it did not appoint, it would rightly want the court to revisit in full the tribunal’s jurisdictional decision. However, the Law Commission’s view is, in short, that the concept that a tribunal is competent to rule on its own competence (abbreviated to “competence-competence”) is a reason to give deference to the ruling of the tribunal on jurisdiction and the process that led to it. The alternative – giving the tribunal’s decision no deference – leads to delay and increased costs and undermines the competence of the tribunal.

Therefore, the Law Commission continues to propose that the approach to jurisdictional challenges should be reformed. It now goes on to say that this reform should be set out in rules of court, rather than enshrined in the Act. This is said to be a “softer” mode of reform than previously proposed and, accordingly, a compromise between the competing views of consultees. 

The proposed new rules, on which views are sought, are that:

• the court will not entertain any new grounds of objection or any new evidence, unless even with reasonable diligence the grounds/evidence could not have been advanced/submitted before the tribunal;
• evidence will not be reheard save exceptionally in the interests of justice; and
• the court will only allow the challenge where the decision of the tribunal on its jurisdiction was wrong (i.e. the court will not decide the issue afresh).

Discrimination in arbitral appointments – three new questions

In its first consultation paper, the Law Commission proposed that an agreement between parties relating to an arbitrator’s protected characteristics (as identified in the Equality Act 2010) should be unenforceable, unless such a requirement constitutes a proportionate means of achieving a legitimate aim. 

In its second consultation paper, based on consultee responses, the Law Commission has identified three new topics of potential reform. It has also clarified the proposal in its first paper in response to consultee concerns, such as by confirming that its proposal was not intended to preclude faith-based arbitrations.

First, the Law Commission considers the position where the parties wish to require the arbitrator to have a nationality different from the parties. As we have previously noted, nationality is often used as a proxy for neutrality in arbitration agreements, and such a requirement represents common practice internationally, including in arbitral rules. The Law Commission agrees: it proposes that it should always be deemed justified to require an arbitrator to have a different nationality to the parties. 

Second, the Law Commission considers whether the bigger problem is discriminatory arbitral appointments, rather than discriminatory arbitration agreements. It asked consultees whether the Act should contain a general requirement that prohibits discrimination in the arbitration context.

It also asked, third, what the remedies for breach of a general prohibition should be.

Comment

This second consultation paper indicates the willingness of the Law Commission to listen to and engage with the views of stakeholders as part of its larger consultation on reform of the Act. In light of the responses received from consultees, it has reversed or adapted its proposals in relation to the three topics addressed in this blog post. 

The Law Commission invites responses to the six consultation questions put forward in its second paper by 22 May 2023. The responses to this paper, and to its first, will be addressed in the Law Commission’s final report and recommendations, due later in 2023.

Allen & Overy will continue to engage with the Law Commission’s review process, as it has done in the past.