Law Commission Releases Second Consultation Paper in Relation to the Arbitration Act 1996

United Kingdom

The Law Commission of England and Wales has released its second consultation paper regarding potential revisions to the Arbitration Act 1996. In contrast to the First Consultation Paper issued in September 2022 covering many potential reforms, the Second Consultation Paper focuses on just three issues. The first potential reform—the governing law of the arbitration agreement—was added because a “significant number” of responses to the First Consultation Paper considered the need for reform in this area. Also, based upon the responses received to the First Consultation Paper, the Law Commission has revised its recommendations to two of the “most controversial of the topics of potential reform”—limits to section 67 challenges for lack of jurisdiction, and discrimination in arbitration.

Governing Law of the Arbitration Agreement

In 2020, the Supreme Court tackled the question of what law should govern an arbitration agreement in the absence of an express choice. This can arise where the underlying contract might choose one governing law, but it is not clear if the parties intended that governing law also to apply to the (separable) arbitration agreement. In Enka v Chubb [2020] UKSC 38, the Supreme Court set out a series of principles to determine the governing law of the arbitration agreement.

The Law Commission has, however, concluded that the principles set out in Enka are complex and their application is not straightforward. Further, the Commission noted that, where an arbitration is seated in London, the parties have not chosen to specify English law as the governing law of the arbitration agreement, and another law governs the underlying contract, the Enka principles could “oust” several beneficial aspects of English law relating to arbitration agreements such as separability, arbitrability, scope, and confidentiality. While there are arguments against reform, such as the fact that parties to a contract may generally expect that the governing law of the contract will also govern their arbitration agreement, overall the Law Commission found that “the arguments in favour of reform carry the day.”

Thus, the Law Commission has proposed a default rule that the law of the arbitration agreement will be the law of the seat of arbitration, unless the arbitration agreement expressly states otherwise. This default rule will have the benefit of seeing more arbitration agreements governed by English law and is far simpler to apply than the current approach. It should also avoid situations like the Kabab-Ji saga, where English Courts and French Courts have reached opposing conclusions on the law applicable to the same arbitration clause.

Limits to Section 67 Challenges for Lack of Jurisdiction

In the First Consultation Paper, the Law Commission recommended that section 67 challenges for lack of jurisdiction take the form of an appeal, rather than a full rehearing. This was due to concerns that a full rehearing might lead to unnecessary delay and costs, and further might give the challenging party a second bite at the cherry after an unsuccessful challenge before the arbitral tribunal.

After consultees pointed out there is no clear distinction between an “appeal” and a “rehearing”, the Law Commission’s new proposal sets out its proposed contours and limits for a section 67 challenge. The Law Commission’s recommendations are in line with the general principle of competence-competence: an arbitral tribunal is entitled to rule on its own jurisdiction. Further, the Law Commission believes that jurisdictional rulings and “the process that led to them” should have some deference from the court. It recommends that in most circumstances the court should not entertain any grounds of objection or evidence that was not before the tribunal and should not rehear evidence. While there are exceptions, those are narrowly limited to when arguments or evidence could not have been brought before the arbitral tribunal, or when “the interests of justice” require a rehearing of evidence. Further, a challenge should only be allowed when the tribunal’s jurisdictional decision was wrong.

The Law Commission has recommended that these limits be encapsulated in court rules rather than in the Arbitration Act. This has two advantages.  First, this “softer” reform allows the specific scope of the court’s review to be tested and adjusted. Second, the proposals fit more naturally within court rules given that they are largely procedural in nature.

Discrimination in Arbitration

In the First Consultation Paper, the Law Commission suggested amending the Act so that any requirement in an arbitration agreement that an arbitrator have a protected characteristic would be unenforceable, unless that protected characteristic was a proportionate means of achieving a legitimate aim. The example provided of a potential legitimate aim was the common requirement that an arbitrator have a different nationality from the parties. On revision, the Commission now proposes that it always be deemed acceptable to require that an arbitrator have a nationality other than the parties’ nationalities because “the appearance of impartiality also matters.”

In light of responses to the First Consultation Paper raising concerns about discrimination in other aspects of arbitration, such as the conduct of the proceedings, the Law Commission has also asked for comments on whether “discrimination should be generally prohibited in the context of arbitration” and what “the remedies should be when discrimination occurs.”

Next Steps

As with the First Consultation Paper, the Law Commission is seeking feedback on these specific reforms. Any interested party may submit their thoughts on these potential reforms directly to the Law Commission by 22 May 2023. The Law Commission will then use these responses to formulate its final proposals to Parliament.