Law reforms to keep London an arbitration hot-spot
Published on 6th Nov 2023
UK Law Commission proposes welcome reforms to the Arbitration Act following extensive consultation
The Arbitration Act 1996 turned 25 in 2021. As an anniversary gift, in November of that year, the Law Commission of England and Wales announced that it would be reviewing it. It was a review that launched a thousand conference talks and webinars, as well as a huge gathering of views by the Commission. And finally, we have the outcome: the Commission's final report and a summary with its proposals for change.
However, this is very much evolution, not revolution. If adopted, the Commission's recommendations – set out below – would not radically change the Act, which many commentators agree has stood the test of time. That said, some key innovations are proposed, which, if implemented, should ensure that London remains one of the most popular arbitral seats worldwide.
Below, we set out the Commission's recommended changes and examine the changes that would be most significant for arbitration users. We also look at areas in which the Commission chose not to recommend changes.
It is up to Parliament whether or not the Commission's recommendations are enacted into law. The King's speech on 7 November 2023 will reveal whether Parliament will consider the Commission's recommendations before the next general election.
The Commission's recommendations
- Summary disposal
The Commission's recommended change: to add a new provision that expressly enables arbitrators to make an award on an issue on a summary basis if a party has no real prospect of succeeding on that issue.
- To be available for any issue which lacks merit, whether the issue arises in a claim or defence, and whatever the issue raised, including jurisdictional objections.
- Parties could opt out of the provision
- The governing law of the arbitration agreement
The Commission's recommended change: to add a new test for ascertaining the governing law of the arbitration agreement.
- In the absence of an express choice, the arbitration agreement would be governed by the law of the seat. This would be the case whether or not the parties had chosen a different law as the law governing the underlying contract.
- The test would replace the more complicated test set by the Supreme Court in Enka v Chubb.
- Emergency arbitrator
The Commission's recommended change: to empower an emergency arbitrator, whose order has been ignored by a party, to issue a peremptory order, which, if still ignored, may result in a court order to comply.
- Challenges to jurisdiction
The Commission's recommended change: to amend the Act such that challenges are no longer heard by way of a full rehearing in all circumstances (as is currently the case per the Supreme Court case of Dallah v Pakistan) but, instead, new pleadings and evidence would only be allowed exceptionally and previous evidence would only be reheard if necessary in the interests of justice.
- Court powers in support of arbitral proceedings
The Commission's recommended change: to add a provision expressly confirming that the English courts may make orders against third parties under section 44 of the Act.
- Such orders would likely deal with, inter alia, the taking of witness evidence, the preservation of evidence, relevant property and interim injunctions.
- Third parties would have full rights of appeal against an order.
- Arbitrator disclosure
The Commission's recommended change: to codify the common law duty on arbitrators requiring them to disclose, on a continual basis, any circumstances which might reasonably give rise to justifiable doubts as to their impartiality.
- Arbitrator resignation and applications for their removal
The Commission's recommended change: to strengthen arbitrator immunity such that arbitrators' liability would be reduced in the event of reasonable resignations by them and applications for their removal where they have acted in good faith.
A new statutory power for arbitrators would allow parties to dispose of baseless claims quickly and efficiently and deter parties from commencing such claims.
Similar mechanisms have been introduced by certain arbitral institutions and positively received by the arbitration community. The SIAC pioneered the idea in 2016 followed by, inter alia, the SCC in 2017 and the LCIA in 2020. The statistics available show that summary disposal has been used in a relatively small number of cases (for example, 5% of cases administered by the LCIA in 2021 and 2022) and with a fairly even success rate.
Overall, the change would be positive for arbitration users. It would likely deter some parties from bringing baseless claims and allow others to dispose of such claims without incurring the costs of a full arbitration proceeding.
The governing law of the arbitration agreement
As discussed previously, English law currently has potentially complicated and unpredictable rules on determining the governing law of the arbitration agreement following the Supreme Court case of Enka v Chubb.
In summary, the Enka test provides that, in the absence of an express or implied choice of law in the arbitration agreement or the main contract, the law of the arbitration agreement will likely be that of the jurisdiction with which the arbitration is most closely connected (with some exceptions).
Interestingly, in the recent case of G v R, the English High court applied the Enka test with the result that in a dispute where the contract was governed by English law but the seat of the arbitration was in Paris, the governing law of the arbitration agreement would be French, not English, law. This was chiefly because French law provides that French law must govern an international arbitration seated in France and the parties were deemed to be aware of this when they chose Paris as the seat.
The judge also commented, obiter, that, even if they were wrong, there was no reason why England would be a more appropriate forum to hear the case.
Currently, the Commission's draft legislation provides that the new test would only apply to arbitration agreements entered into on or after the date on which the new legislation takes effect. In other words, all arbitration agreements that exist now and up until that date would be subject to the Enka test.
Some members of the arbitration community have raised concern that this would cause unnecessary complications. Instead, it has been suggested that the new test should apply to all arbitration proceedings started on or after the new legislation takes effect (regardless of whether the arbitration agreement was entered into earlier). This will ultimately be decided when the legislation is reviewed by Parliament.
The question of which law governs the arbitration agreement can be extremely important when different jurisdictions have different approaches to critical issues that often arise in arbitral proceedings. Such issues include: confidentiality (of both the arbitration case details and documents submitted or created in proceedings); arbitrability (whether a dispute can be resolved through arbitration); scope (whether a dispute falls within the arbitration agreement); and separability (whether the arbitration clause survives any invalidity of the matrix contract).
Arbitrability, scope and separability can all affect whether or not a claim may be made at all. While English law adopts an arbitration-friendly broad approach to these matters, other jurisdictions take a less arbitration-friendly approach and parties can find that they are unable to bring their claim in arbitration.
Emergency arbitrators (EA) are currently limited in their ability to enforce compliance where one party ignores their order and the other party is limited in its ability to seek enforcement. This is because the Act does not contain any provisions addressing EAs since they are a relatively recent development, post-dating the Act. The rise of emergency arbitration, including its incorporation into major arbitral rules since c.2011, has increased the need for this gap in the Act to be filled.
This is particularly important because the parties that use emergency arbitration require urgent relief and must have recourse if the other party fails to comply with an order. Giving EAs greater enforcement powers is therefore a positive development and provides parties with greater protection.
The Commission considered making EAs subject to the entirety of the Act but ultimately concluded that it would be better to keep EAs separate. This is sensible: there are many sections of the Act governing arbitrators and a more extensive consultation with stakeholders than that the Commission conducted would be required to make an informed decision. In any case, where EAs are available under institutional (or ad hoc) arbitration rules, such rules can and do make provision to regulate them.
The ones that got away: what the Commission did not consider necessary
Some areas considered by many to be ripe for reform have not been picked up this time. However, their supporters should take heart. Some of the changes now proposed in this Fourteenth Programme of Law Reform were mooted but not adopted in the Thirteenth Programme which was only six years ago (and was the first time the Commission reviewed the Act) (such as summary disposal).
Areas that the Commission did not recommend be changed but where arbitration users would do well to watch for future reform include discrimination, confidentiality and appeals on a point of law.
The Commission considered introducing a general statutory prohibition on discrimination. While it noted that preventing discrimination within arbitration proceedings is of paramount importance, it concluded that such a prohibition could lead to practical problems (for example, regarding enforcement) and encourage satellite litigation or challenges to awards. It is now up to the arbitration community to take this critical issue forward.
The question here was whether to add an express provision to ensure the confidentiality of arbitrations seated in England.
The Commission concluded that this was unnecessary. First, if the parties agree that their arbitration is confidential, that itself will ensure the maximum protection available under English law.
It is also unlikely that a single statutory rule would be sufficiently comprehensive or nuanced: arbitrations and parties vary in their need for confidentiality, the level of confidentiality that should be applied and the source of the confidentiality.
Finally, this is an area in which the law is still developing (for example, regarding investor-state arbitration) and imposing a statutory rule now would risk reducing the flexibility currently available to parties.
- Appeal on a point of law
The Commission concluded that the non-mandatory provision allowing parties to appeal on a point of law should remain non-mandatory.
Parties frequently choose to exclude this ground for appeal, including by adopting the LCIA or ICC rules. This flexibility was the key reason that consultees overwhelmingly voted to retain the provision, and why the Commission has recommended accordingly.