September 20, 2023

Reform of the Arbitration Act 1996: Law Commission’s Final Report and Amendment Bill

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REFORM OF THE ARBITRATION ACT 1996: LAW COMMISSION’S FINAL REPORT AND AMENDMENT BILL

On 6 September 2023, the Law Commission of England & Wales published its final report on potential reforms to the English Arbitration Act 1996 (the “Act”). The report recommends making changes in six key areas, as well as a handful of other minor amendments, and includes a draft bill to put these changes into effect (the “Amendment Bill”).

We shared our preliminary assessment on some of the areas identified by the Commission in a series of posts last year and earlier this year (see our publications concerning the overview of the proposed reforms, summary disposal and the courts’ supportive powers). In this briefing, we comment on the Amendment Bill and the practical implications for parties considering arbitrations in England & Wales.

Background

On 30 November 2021, following a request from the Ministry of Justice, the Commission announced that it would review the Act as part of its 14th programme of law reform.

In January 2022, the Commission commenced its review, marking the 25th anniversary of the Act. We explained in a previous post that this was a welcome initiative given the passage of time since the Act was first published and the increasing competition from other arbitration-friendly jurisdictions, especially in Asia.

On 22 September 2022, the Commission published its first consultation paper. The Commission received responses from around 118 individuals and organisations, including a detailed response from this firm. These responses showed a degree of consensus on some key areas of reform, but a wide range of views on other topics and on the scope of the Commission’s review.

On 27 March 2023, the Commission followed up on three of the more controversial topics in a second consultation paper, namely: (1) governing law of the arbitration agreement; (2) challenging an award for lack of substantive jurisdiction under Section 67 of the Act; and (3) discrimination. The Commission received around 60 responses which, again, were varied.

Overview of the Amendment Bill

The Commission has identified six “major initiatives” introduced by the Amendment Bill:

1. Governing law of the arbitration agreement: The Commission has proposed a new rule that, in the absence of an express choice from the parties on the governing law of the arbitration agreement, the applicable law will be the law of the seat.

2. Summary disposal: The Commission has recommended that arbitrators be afforded an express power under the Act to issue an award to dispose of any issue (e.g., jurisdictional objection), claim or defence which lacks merit on a summary basis.

3. Challenging an award for lack of substantive jurisdiction: The Commission has concluded that the framework for challenging awards for lack of substantive jurisdiction under Section 67 of the Act should be revised to prevent a full re-hearing of jurisdictional issues by the courts where a Tribunal has already undertaken a full hearing on these issues. However, rather than effecting this change through legislation, the Commission has proposed that the Amendment Bill: (1) extend the available court remedies; and (2) allow rules of court that impose limits on the grounds and evidence the court may hear. Additionally, the Commission has proposed that, even if the Tribunal is found not to have jurisdiction, it should still be empowered to issue an award for costs against the party that wrongly brought the proceedings.

4. Courts’ supportive powers: The Commission has recommended that the courts’ supportive powers be extended to cover: (1) peremptory orders by emergency arbitrators; and (2) third parties.

5. Arbitrators’ duty of disclosure: The Commission has proposed that the arbitrators’ general duty of disclosure under common law is codified in the Act.

6. Arbitrators’ immunity: The Commission has suggested strengthening arbitrators’ immunity in relation to: (1) applications for removal; and (2) resignations.

Additionally, the Commission has recommended “minor corrections” including with regard to: (1) appeals of applications to stay legal proceedings; (2) preliminary applications to court on jurisdiction and points of law; (3) the time limits for challenging awards; and (4) unused provisions on domestic arbitration agreements.

Key Amendment 1: Governing Law of the Arbitration Agreement

Clause 1 of the Amendment Bill introduces a new rule that, in the absence of an express choice from the parties on the governing law of the arbitration agreement, the applicable law will be the law of the seat.

This new rule would replace the common law test laid out by the UK Supreme Court in Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb [2020] UKSC 38. In that case, Enka (which was represented by Shearman & Sterling) successfully argued that:

  • where there was an express or implied choice of law for the wider contract in which an arbitration agreement is found, such choice would typically extend to the arbitration clause absent strong reasons to the contrary (e.g., where such law would render the clause ineffective); and
  • where there was no express or implied choice of law for the wider contract, an arbitration clause found within that contract would ordinarily be governed by the law of the seat chosen by the parties (subject to limited exceptions).

The issue of how to determine the governing law of the arbitration agreement in the absence of an express choice by the parties is an important one that has divided opinion within the arbitration community for many years. As Professor Maxi Scherer noted in her 2021 Keynote Speech for the London Branch of the Chartered Institute of Arbitrators, there is a significant difference in approach across jurisdictions between a default choice of the law of the seat, a default choice of the governing law of the contract, giving effect to the so-called ‘validation principle’ and an approach searching for the parties’ common intent. This reflects a tension between: (1) seeking to give effect to commercial parties’ intuitive assumptions that a governing law of a contract extends to all clauses in that contract, including the arbitration clause; and (2) strong policy reasons in favour of the law of the seat applying to an arbitration agreement.

The one point on which there is consensus is that the manner of determining the governing law of the arbitration agreement should be clear and certain in order to avoid costly satellite litigation in the absence of an express choice. From this point of view, the Commission’s proposal is an improvement on the comparatively complex common law test in Enka.

The Commission’s decision to opt for the law of the seat is controversial, but conforms with typical best practice when parties expressly choose the governing law of their arbitration agreement and reflects the prevalent approach identified by Professor Scherer in her 2021 comparative analysis of 80 jurisdictions around the world.

If the Commission’s proposal is adopted, it will be interesting to see whether other common law jurisdictions that currently adopt the same or a similar test as in Enka (including key arbitration centres like Singapore and Hong Kong) will update their approach.

Key Amendment 2: Summary Disposal

Clause 7 of the Amendment Bill grants arbitrators the express power to issue an award to dispose of any issue (e.g., jurisdictional objection), claim or defence which lacks merit on a summary basis, following an application by one or other of the parties. The relevant threshold is that either the issue, claim or defence has “no real prospects of succeeding”.

In our view, this is a welcome development (we note that the Commission refers to Shearman’s consultation response on this topic). As we discussed in our previous post, providing for summary disposal is likely to improve the efficiency of arbitration proceedings, prevent frivolous or vexatious claims (e.g., ‘guerrilla tactics’ to prolong or disrupt proceedings) and alleviate due process concerns. The Commission’s proposed threshold of “no real prospects of success” is also sensible and in line with the test used in English court proceedings.

Helpfully, the Commission has sought to retain the flexibility and autonomy that parties value in arbitration by neither prescribing a summary disposal procedure nor proposing any deadline by which applications must be made. This will allow parties to continually re-assess the merits of their positions as an arbitration progresses, and provide the Tribunal with an additional case management tool to resolve claims in the most efficient manner possible.

The Commission’s proposal is in line with a growing trend to provide for summary disposal in institutional rules. However, summary disposal powers are generally missing from national arbitration laws, so the Commission’s proposal is likely to enhance the status of England & Wales as a leading arbitral seat.

Key Amendment 3: Challenging an Award for Lack of Substantive Jurisdiction

Clauses 10 and 11 of the Amendment Bill revise Section 67 of the Act to prevent a full re-hearing of jurisdictional issues by the courts where a Tribunal has already undertaken a full hearing on these issues. To do so, Clauses 10 and 11:

  • extend the court remedies currently available under Section 67 so that they align with those currently available for challenges under Sections 68 and 69 of the Act (Clause 10); and
  • allow rules of court to be developed that impose limits on challenges brought in the courts in relation to an objection that the Tribunal has already ruled on. Specifically, these rules would prohibit: (1) the hearing of new grounds of objection and new evidence, unless the applicant did not know or could not with reasonable diligence have discovered these grounds or evidence in the arbitration; and (2) the re-hearing of evidence already heard by the Tribunal, unless necessary in the interests of justice (Clause 11).

Additionally, Clause 6 of the Amendment Bill confirms that, even if the Tribunal is found not to have jurisdiction, it will still be empowered to issue an award for costs against the party that wrongly brought the proceedings.

The most important proposal is that introduced by Clause 11 regarding rules of court that would limit the scope of the courts’ review under Section 67. This changes the current position under English law established in Dallah Real Estate and Tourism Holding Company v The Ministry of Religious Affairs, Government of Pakistan [2010] UKSC 46. In that case, the UK Supreme Court held that a challenge under Section 67 entails a full re-hearing of argument and evidence before the courts even if the question of the Tribunal’s jurisdiction has been fully debated in the arbitration.

Again, this is a controversial topic among arbitration practitioners. Indeed, the Commission’s final report notes that, although a significant majority of consultees favoured reform, there were “strong views both for and against”, with “[s]ome consultees report[ing] that there were opposing views within their own organisations”.

Our view is that the Commission’s proposal is sensible, practical and favourable to commercial parties. The existing approach in Dallah has significant time and cost implications, but also raises a more fundamental question of fairness since it allows the losing party to improve its case based on its experiences before the Tribunal and the Tribunal’s decision. We see no reason in principle why a court cannot review a Tribunal’s decision based on the evidence heard in the arbitration (subject, of course, to any new grounds or evidence that were not available in the arbitration or unless a different approach is necessary in the interests of justice). As the Commission noted, this is “consistent with the principle of competence-competence, and indeed gives it some substance”.

Still, this is perhaps one area where the Commission could have gone further by proposing a statutory amendment rather than leaving rules of court to be developed. Whilst the Amendment Bill would provide a legislative stimulus for the courts to develop new rules and guidance on what those rules should contain, in the meantime, the approach in Dallah will likely continue to prevail. The courts should be ready to promptly pick up the mantle and resolve this issue once and for all.

Key Amendment 4: Courts’ Supportive Powers

Clauses 8 and 9 of the Amendment Bill clarify certain aspects of the English courts’ existing powers in support of arbitrations. Specifically, they provide that:

  • emergency arbitrators can issue peremptory orders, and such orders will benefit from the same court support as a Tribunal’s peremptory orders (Clause 8); and
  • all of the courts’ supportive powers under Section 44 of the Act can be exercised against third parties, and such third parties do not require leave of the court to appeal (Clause 9).

These proposed amendments are another welcome change (the Commission’s report again refers to Shearman’s consultation response). As we indicated in our previous post on this topic, the Commission’s proposals will provide greater certainty and consistency, strike the right balance between the rights of different stakeholders, and bring English law in line with other major arbitration centres around the world.

In respect of third parties, the clarifications address the current lacuna whereby third parties could potentially take steps to thwart an arbitration (e.g., by destroying relevant documents) without any recourse against them. They also bring the courts’ supportive powers in line with the English courts’ powers in respect of court litigation.

Key Amendment 5: Arbitrators’ Duty of Disclosure

Clause 2 of the Amendment Bill is a mandatory provision that codifies the arbitrators’ general duty of disclosure, previously established by the UK Supreme Court in Halliburton Company v Chubb Bermuda Insurance Ltd (formerly known as Ace Bermuda Insurance Ltd) [2020] UKSC 48.

Specifically, Clause 2 requires that an arbitrator disclose “any relevant circumstances” the arbitrator is or ought reasonably to be aware of that “might reasonably give rise to justifiable doubts as to the individual’s impartiality” in relation to the arbitration proceedings. The duty is continuing and commences earlier than the duty established in Halliburton, from the moment when the arbitrator is approached with a view to appointment. However, beyond this general test, Clause 2 does not specify precisely what should be disclosed. A failure by an arbitrator to make an appropriate disclosure can potentially lead to their removal under Section 24 of the Act.

Both Clause 2 and the decision in Halliburton have been criticised by some arbitrators and arbitration practitioners as placing an unreasonable burden on arbitrators. Going beyond Halliburton, Clause 2 refers broadly to disclosure of circumstances that the arbitrator “ought reasonably to be aware”, rather than an arbitrators’ actual knowledge. This is a more stringent requirement than similar provisions in:

  • Article 5.4 of the 2020 LCIA Rules (“any circumstances currently known to the candidate which are likely to give rise in the mind of any party to any justifiable doubts as to his or her impartiality or independence”); and
  • General Standard 7(d) of the International Bar Association’s 2014 Guidelines on Conflicts of Interest in International Arbitration (“a duty to make reasonable enquiries to identify any conflict of interest, as well as any facts or circumstances that may reasonably give rise to doubts as to his or her impartiality or independence”).

However, the Commission’s proposed amendment was supported by the majority of responses to the Commission’s consultation and is in line with international best practice. It seeks to protect commercial parties and ensure that the appearance of impartiality is maintained. It also generally reconfirms the UK’s commitment to upholding the integrity of the arbitral process.

Key Amendment 6: Arbitrators’ Immunity

Clauses 3 and 4 of the Amendment Bill strengthen the arbitrators’ immunity by providing that:

  • an arbitrator will not be liable for the costs of a court application for his/her removal, unless the arbitrator acted in bad faith (Clause 3); and
  • an arbitrator’s resignation will not give rise to any liability for the arbitrator unless such resignation is unreasonable (Clause 4).

In our view, these amendments to the current position under English law are sensible and pragmatic. They strike the right balance between: (1) protecting arbitrators so they can make robust and impartial decisions that preserve the integrity and effectiveness of the arbitral process, without fear of retaliation; and (2) protecting parties against arbitrators acting unreasonably or in bad faith. They are also consistent with the spirit of Section 29 of the Act, which provides for arbitrator immunity more generally.

Areas Not Covered by the Amendment Bill

We note that, in some corners of the arbitration community, the Amendment Bill is perceived as a missed opportunity. This is because the Commission has opted not to address certain topics that were identified in its consultation papers. For example:

  • The Commission opted not to introduce a general prohibition on discrimination in arbitration. The Commission concluded that existing legislation, as well as the complexity of arbitration, rendered this unworkable and unnecessary. Furthermore, discrimination by arbitrators is currently addressed through duties to act fairly and impartially (which would include acting without discrimination). Arbitrators can be removed if they do not comply with these obligations.
  • The Commission similarly decided not to include a statutory duty of confidentiality. Rather, the Commission concluded that arbitrations are not (and need not be) confidential save for where there are express contractual terms, implied terms or provisions of arbitral rules providing for confidentiality, or where arbitrators make a binding ruling to that effect.
  • The Commission considered appeals of awards on a point of law under Section 69 of the Act, but (in light of generally negative consultation responses) decided to preserve the current “opt-out” mechanism as a compromise between promoting the finality of arbitral awards (by limiting appeals) and correcting blatant errors of law. The Commission explained that it did not wish to “unsettle the preferred relationship with section 69 that has been struck by arbitral rules and arbitration clauses”.
  • The Commission also considered the repeal of Section 44(5) of the Act, which sets out the threshold for court intervention. While the consultees were more split on this topic, the Commission followed the majority and opted against reform. In line with our analysis in our previous post on the courts’ supportive powers, the Commission noted that Gerald Metals SA v Timis & Ors [2016] EWHC 2327 (Ch) did not decide that emergency arbitration provisions preclude courts from exercising their Section 44 powers and that, perhaps, it had been “misperceived”.
  • The Commission decided not to address other “hot” topics in arbitration, such as the use of technology and environmental concerns. Whilst it may be some years until another review, we note that these topics are well suited to incremental reform through arbitration rules, guidelines and pledges in the meantime.

Next Steps

As anticipated from the consultation papers, the Commission did not ultimately propose a ‘root and branch’ reform of the Act, noting the “consensus that the Act works well”. Instead, the Commission focused on a small number of key updates aimed at improving clarity, certainty and efficiency of arbitration in England & Wales. Overall, our view is that the Commission’s proposals are balanced and pragmatic and should enhance the status of England & Wales as a leading seat of arbitration.

The Commission will now present its recommendations and the Amendment Bill to the Government. It is then for the Government to decide whether to implement some or any of the Commission’s recommendations and whether to introduce the Amendment Bill into Parliament.

While the timeframe is yet unclear, the Parliamentary Under Secretary of State in the Ministry of Justice, Lord Bellamy KC, stated that the Government “will respond to the Law Commission’s report shortly so we can maintain the UK’s reputation as a world leader in resolving legal disputes”. The exclusion of potentially controversial areas of reform from the Amendment Bill suggests that the Commission is keen to ensure a timely and efficient passage of the Amendment Bill through Parliament in advance of the UK general elections at the end of 2024 or beginning of 2025.

Authors and Contributors

Alex Bevan

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Matthew Skinner

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David Hume

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Alastair Livesey

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Bianca Vasilache

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James Elliott

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