Last month saw the end of the second round of the UK Law Commission’s consultation on reform of the Arbitration Act 1996, the legislation which provides the framework for arbitration in England and Wales. We have reported on the current status of the consultation and are watching for the final recommendations.
A central topic of the review is the proper law of the arbitration agreement – that is, what law governs the parties’ agreement to arbitrate if they have not thought to specify this expressly. The seminal UK Supreme Court decision from 2020, Enka v Chubb considered the issue, but created several uncertainties and ambiguities.
The English Supreme Court overturned the Court of Appeal’s decision that the law of the seat should be the presumptive law of the arbitration agreement. Instead, the Court in Enka held that in some circumstances an express choice of law in an underlying commercial contract may govern the arbitration agreement, or, in the absence of such a choice – English common law rules must be applied to determine the system of law most closely connected to the arbitration agreement.
This has opened several cans of worms. Commercial parties often choose arbitration precisely to avoid the foreign law governing the underlying contract from interfering with the conduct of the arbitration or the interpretation of an arbitration agreement. The Enka ruling expands the possibility for objections. For example: is a dispute arbitrable under a foreign law which may apply to the arbitration clause? Is the doctrine of separability even recognized under that system? Does this mean that an express choice of law for the underlying commercial contract trumps an implied choice of law for the arbitration agreement by adoption of certain institutional rules? (for example, Rule 16(4) of the LCIA rules, which states that the default law of an arbitration agreement is the law of the chosen seat).
The Law Commission is eager to propose solutions for such ambiguities in legislation and avoid unpleasant surprises for parties. Regardless of what amendments are ultimately made to the law, the issue is a timely reminder to check the four “S’s” are present in all your arbitration agreements:
Specify the law?
Many standard arbitration agreements do not specify the governing law of the arbitration agreement. For the reasons above, until such time as English law is clarified, they should. Simple words will suffice: “The law governing this arbitration agreement will be [English] law”.
Seat?
State the seat of the arbitration, expressly. In international arbitration, it is common for the laws of more than one jurisdiction to apply to the dispute: the law governing the underlying contract; the law governing the arbitration procedure; the law governing the arbitration agreement; and the law of the jurisdiction(s) for enforcement. The seat is particularly important because this is the legal place of the arbitration and the law of the seat will determine the extent of the local court’s powers to assist and support the arbitral process. Avoid arguments that a geographical place for conduct of proceedings has been selected, but no legal place. The solution is (as ever) to be express: “The seat and legal place of the arbitration will be [London, England]”.
Scope?
Ensure the arbitration agreement captures the disputes you want it to. If that means adopting a very wide scope – do so. If that means carving out certain categories of dispute, be clear and unambiguous. If it’s a wide scope you want, the current model wording of the LCIA is a good starting point: “[a]ny dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination [will be resolved in arbitration]”.
Silence?
Check for where the clause is inadvertently silent as this can reveal critical gaps in the agreement. One such gap, which is often overlooked in pathological clauses, is – astonishingly – a failure to agree to arbitrate. It may not be obvious to some commercial parties that words such as “[i]n the event of any dispute between the parties pursuant to this Agreement, the parties will endeavor to first resolve the matter through Swiss arbitration” have been held to specify no agreement to arbitrate (see Christian Kruppa v Alessandro Benedetti, Bertrand des Pallières [2014] EWHC 1887 (Comm)). Instead, be sure to plug that gap: “[a]ll disputes [specify the scope], shall be referred to and finally resolved by binding arbitration administered by [your institution] and conducted pursuant to [specified Rules].”
