The Law Commission presents its proposals on reform of the Arbitration Act 1996

Important changes are proposed for the law governing arbitration within England and Wales. A year after the publication of its first consultation seeking views on reform of the Arbitration Act 1996 (the “Act”), the Law Commission has published its report together with a draft Bill. The hope is that the new amending Act may take effect this year or in any event ahead of the expected 2024 general election.

This article will explore the main proposed changes, highlighting the Commission's efforts to modernise the Act to ensure that more than two decades after the Act's inception, England & Wales, and particularly London, will remain a global seat of choice for arbitration.

Taking on board the views of consultees, the Law Commission has concluded that ‘root and branch reform’ is not needed and noted a consensus in its consultations that the Act works well. Instead, it has proposed a few major initiatives and clarifications to the current Act, together with some minor reforms. We give an overview of the main proposals below and also note a few of the more significant areas which the Law Commission has decided to leave unamended. Bird & Bird participated in both consultations and the Law Commission has kindly noted several of our comments. Overall, we welcome the proposed changes which we consider strike a balance between incremental improvement and endorsing what has proved a successful and enduring piece of legislation.

Steps to Reform

In November 2021, the Law Commission initiated a review of the Act, the cornerstone legislation governing arbitration in England, Wales, and Northern Ireland.

It carried out two public consultations in September 2022 and March 2023. These consultations sought input from legal professionals and stakeholders to assess the suitability of the current Act and consider potential areas for reform. The Report and draft Bill is the Law Commission’s final recommendations based on those Consultations.

The Major Initiatives

Governing Law of the Arbitration Agreement

The topic of which law should govern an arbitration agreement, in the absence of an express choice, has been the subject of various decisions and much debate both in the UK and internationally, and not all jurisdictions follow the same approach. The issue arises from the fact that the arbitration clause or agreement in a contract is considered separate from the main contract and so can, and often is, governed by a law different to the main agreement. The choice is typically between the law of the seat chosen for any arbitration or the governing law of the main contract. The English law position was settled in the 2020 UK Supreme Court decision of Enka v Chubb. Enka states that, in the absence of an express choice of the governing law of the arbitration agreement, the law governing the main contract will generally be implied as the law governing the arbitration agreement. Where there is no choice of the law governing the main contract, the arbitration agreement will be governed by the law with which it is most closely associated, which will usually be the law of the seat.

While this decision was rooted in established contractual and choice of law principles, the position was considered by many arbitration practitioners to be unsatisfactory as it had the potential to undermine the parties’ choice of London as a supportive arbitral seat where the application of a different law to the arbitration agreement could lead to satellite litigation on issues of scope and arbitrability which would not arise under English law. The Law Commission agreed this position needed to change to ensure simplicity and certainty. As such, the draft Bill recommends (in line with the views expressed by many practitioners, including Bird & Bird) a default rule that the law of the seat should govern the arbitration agreement in the absence of an express agreement otherwise. It is important to note that this approach is proposed only to apply to arbitration agreements made after the legislation comes into effect.

Codifying an Arbitrator’s Duty of Disclosure

Arbitrators have a legal duty to disclose to the parties any circumstances which might reasonably give rise to justifiable doubts about their impartiality, as established by the UK Supreme Court in 2020 in Halliburton v Chubb. This duty falls to be assessed against the circumstances when the disclosure might be made. The Law Commission's initial consultation paper recommended that this common law duty be codified and included in the Act. Most respondents agreed with the proposal, but some expressed concerns about the need to create a statutory duty and how it would work in practice.

Having considered the views submitted, the Law Commission recommends proceeding with codification. Clause 2 of the draft Bill states that arbitrators have a continuing duty to disclose any circumstances which might reasonably give rise to justifiable doubts as to their impartiality following the Supreme Court’s ruling. The proposed drafting does not stipulate what needs to be disclosed as this will vary from case to case and can be developed through case law (as it has to date) or addressed in arbitral rules. This is to ensure that that the flexibility offered by the common law position remains.

The Law Commission also asked consultees to consider what state of knowledge should apply to this duty of disclosure. Arbitrators can only disclose matters of which they are aware, but how far should the duty require them to make enquiries? In its Report, the Law Commission reports a variety of responses and a variety of approaches to this same question among arbitral bodies and other jurisdictions. Ultimately, having canvassed the various options, the Law Commission recommends that an arbitrator should be under a duty to disclose what they actually know and what they ought reasonably to know. This section part may, in particular circumstances, require an arbitrator to make inquiries, although it may not always do so.

Summary disposal of cases

There is currently no express power under the Act, which permits summary disposal of cases. The general duty on arbitrators at section 33(1)(b) to adopt procedures which avoid unnecessary delay and expense may provide such a power explicitly, but experience and caselaw suggests it is rarely used, possibly due to the risk of challenge to awards by parties claiming that they had not been given a reasonable opportunity to put their case. The Law Commission noted some consultees referred to ‘due process paranoia’, which led to arbitrators declining to use summary procedures to dispose of weak claims.

The Law Commission has recommended that a new express provision be adopted to allow any party to apply to the tribunal for “an award on a summary basis” in relation to a claim, defence or specific issues where the tribunal considers that it has “no real prospect of success”. Before exercising this power, the draft Bill specifically states that the “tribunal must afford the parties a reasonable opportunity to make representations to the tribunal”.

The provision is proposed to be non-mandatory, so the parties may choose to opt-out or else to replace it with another mechanism, such as the summary mechanism appearing in many institutional arbitration rules. In this regard, it is noticeable that the Law Commission proposes the default test should be “no real prospect of success”, as in domestic court litigation, rather than the “manifestly without merit” standard, which is becoming the international standard in many institutional rules.

The hope is that introducing such a clear statutory power should encourage parties and tribunals to consider summary disposal more often as a means to dispose of unmeritorious claims, defences or arguments, and thereby reduce the costs and duration of arbitration in appropriate cases.

Challenging an Award Under Section 67 (Substantive Jurisdiction)

Section 67 of the Act allows a party to challenge an arbitration award on the basis that the tribunal lacked substantive jurisdiction, meaning there was no valid arbitration agreement, the tribunal was not properly constituted, or matters have not been submitted to arbitration in accordance with the parties’ agreement. The UK Supreme Court in Dallah Real Estate v Pakistan [2010] UKSC 46, held that such a challenge is potentially by way of a full rehearing, where the decision of the tribunal on its own jurisdiction is of no legal or evidential value.

In the consultation, the Law Commission investigated whether the current section 67 procedure resulted in unnecessary duplication of time, costs, and created issues of unfairness between the parties. In particular, where a party had challenged jurisdiction before the tribunal, which had ruled on the issue, whether it was appropriate for a further challenge before the court to incur the time and costs of a full rehearing.

While responses were divided, most agreed with the proposed reform, so the Law Commission now proposes that court rules be amended to provide that a full rehearing under section 67 should not be allowed if a party has already disputed the jurisdiction of the tribunal and the tribunal has already ruled on the matter. In this scenario, the court will not entertain any new grounds of objection or new evidence unless they could not, with reasonable diligence, have been put before the tribunal, and evidence will not be reheard, save in the interests of justice. This approach aims to be both practical and protect parties who have received arbitration awards in their favour from dealing with strategic challenges to the jurisdiction of the tribunal that would result in unnecessary additional time and costs to both sides.

If the proposal is adopted, it will be for the Civil Procedure Rules Committee responsible for the court rules to effect the changes. The fact that these changes will be procedural in nature will also allow them to be tweaked if deemed necessary at a later date without parliamentary amendment.

Significantly, the Law Commission does not propose any changes to section 103 of the Act, which gives effect to the New York Convention and the ability of a party to challenge enforcement of a foreign award within England and Wales on the basis that the tribunal lacked jurisdiction (i.e., under Article V of the New York Convention). To this extent, the Law Commission notes that the regime for challenging awards seated in England and Wales may become “more efficient” than under the New York Convention.

Arbitrator's Liability on Resignation or Removal

Section 29(1) of the Act already provides that arbitrators are not liable for acts done or omitted in the discharge of their functions unless the act or omission is shown to be in bad faith. The Law Commission recommends two changes to strengthen or clarify this immunity. First, arbitrators should not be held liable for resigning unless it is shown to be unreasonable. This is intended to reduce the deterrent for appropriate resignations where an arbitrator would thereby lose the protection of section 29(1). Second, the arbitrator should not be held liable for costs if a party applies to court for their removal (under section 24) unless they are shown to have acted in bad faith. This is intended to remove the risk that arbitrators subjected to an improper application for their removal would concede due to the risk of incurring a costs liability on the application.

Court-Ordered Interim Measures Against Third Parties

Section 44 of the Act grants power to the court to make orders in support of arbitration in the same way it could in domestic proceedings in relation to certain relief, including taking or preserving evidence, inspection or sampling of property, and interim injunctions, amongst others. However, there has been ambiguity in the caselaw regarding whether these powers could apply to orders against third parties as well as parties to the arbitration. The Law Commission recommends clarifying that such orders do indeed extend to third parties, as they would in domestic litigation.

Emergency Arbitrators

The Act has no provisions dealing with Emergency Arbitrators ("EAs") since their introduction has come since 1996. The Law Commission proposes that they now be accommodated in two respects: (1) to allow court enforcement of peremptory orders made by EAs in the same way as for ordinary tribunals, and (2) to allow EAs to give a party permission to approach the court for urgent relief (such as an injunction) under section 44(4) of the Act. Both changes are intended to support the EA process and offer further options for situations where an EA’s order for interim relief is ignored.

Several areas were considered but not recommended for reform:

Confidentiality

Having again reviewed the arguments for codifying an obligation of confidentiality in the Act, the Law Commission has decided not to recommend this. The report concludes that it would be hard to find a ‘one size fits all’ approach and that any general rule with exceptions would become complex and problematic. Not least at the time when some consider confidentiality a vital feature of arbitration (and included it in their agreements or choose rules that impose it explicitly), whereas other voices and some types of arbitration (such as investment arbitration) appear increasingly to treat a degree of transparency as a vital feature. The report concludes (as had the report on which the original Act was based) that the existing flexible common law approach is effective and preferred so that the extent of confidentiality should remain nuanced, capable of development and (hopefully) future-proof.

Discrimination

The Law Commission had also raised the possibility of amending the Act to prohibit discrimination in the context of arbitration and considered how this might be done, including what remedies could be invoked if discrimination was held to occur. Responses from consultees were split between those who were in support of some sort of amendments and those who, although agreeing that discrimination could not be justified, had concerns as to how rules of this nature could be applied and whether they would lead disruptive or disappointed parties to use such provisions to engage in satellite litigation or to challenge arbitral awards. Further, arbitrators who may have been discriminated against because a party had not appointed them might never find out because of the confidential nature of the process, so it was unclear how any legislation could guarantee more diverse appointments. There were also concerns about complicating the Act by importing mechanisms from the Equalities Act, which might put off international parties, or conversely establishing a separate regime which might conflict with the Equalities Act.

Overall, the Law Commission concluded that well-meaning legislation risked worsening arbitration without necessarily producing the outcomes sought.

Appeal on Point of Law

Unlike the UNCITRAL Model Law, section 69 of the Act allows a right for parties to appeal to the court from a decision of the tribunal on a point of England and Wales law. This is a non-mandatory section of the Act, so parties can opt-out, for example, by selecting arbitral rules (such as those of the LCIA or ICC) which disapply such a provision. The Law Commission asked whether section 69 struck a reasonable balance between the finality of arbitration decisions (which tends against substantive appeal), and the consistency and development of the common law (which might favour appeal). Despite “occasionally lively debate”, the Law Commission concluded that section 69 already strikes the right balance and saw no evidence that the provision is problematic in practice or that there was a better alternative approach. Section 69 will remain an interesting feature in the arbitration landscape in England and Wales.

Next Steps

The Law Commission’s Report and draft Bill have been presented to the UK government for consideration, which will decide what changes it will take forward into legislation. The speed of any changes and whether they will be enacted before the general election, expected in 2024, will depend on whether any of the changes are considered controversial. This is difficult to predict, and indeed, some criticisms have already been raised on the draft, including as to the proposal that the change regarding the law of the arbitration agreement will apply only to such agreements entered into after the date the change comes into force. Nevertheless, it is hoped that the changes can be enacted soon so as to enhance further the arbitration landscape in London and elsewhere in England, Wales and Northern Ireland.

With thanks to Waqas Hussain for his help with this article.