The UK Law Commission’s review of the Arbitration Act 1996 has concluded with the publication of its final recommendations. The final recommendations present a welcome set of practical changes that fine-tune legislation that is already widely considered to be functioning effectively—and for which, as the Law Commission affirmed, there was never any case for a root and branch reform.
On 6 September 2023, the UK Law Commission published its final report (the Report) setting out its recommendations following its review of the Arbitration Act 1996 (the Act). The UK Law Commission, established by the Law Commissions Act 1965, is an independent body tasked with reviewing the laws of England and Wales and recommending reforms where needed to ensure that they are fit for purpose and up to date.
The publication of the Report concluded a process that began in March 2021, and which involved two public consultations with a wide range of stakeholders including industry practitioners. The first consultation paper was published in September 2022 and the second consultation paper was published in March 2023.
The Law Commission’s recommendations reiterate what has been a common theme in its observations published during its review of the Act: that it does not consider “root and branch” reform of the Act to be necessary, with focus instead being placed on fine-tuning the Act with the UK government’s aim of ensuring that it remains “clear, modern and as efficient as possible.”
As examined in this LawFlash, the Report’s most notable recommendations relate to the following areas:
- Appeals on jurisdiction under Section 67 of the Act
- The law of the arbitration agreement
- A duty of disclosure for arbitrators
- Summary disposal
- Strengthening arbitrator immunity
- Court orders to support arbitrations under Section 44 of the Act
The Report explains that the Law Commission also considered a number of other topics as part of its review, in respect of which it has ultimately decided not to recommend changes. In those areas, the Law Commission concluded that the present state of affairs was satisfactory and/or potential amendments to the Act were not workable in practice. Those areas included the following:
- The potential codification of rules on confidentiality
- The prohibition of discrimination in appointing arbitrators
- The extent and nature of the English High Court’s powers under Section 44 of the Act
- Appeals on points of law under Section 69 of the Act
The Law Commission has proposed granting arbitrators a power to summarily dispose of matters (by way of a new Section 39A) that may be exercised where a party’s case has “no real prospect of success,” the same test used by the English High Court. The Report suggests that parties be permitted to agree to “opt-out” of granting this power to arbitrators or otherwise set limits on its use.
The Report recognises that arbitrators have been granted the power of summary disposal (1) implicitly, by way of their existing duty to avoid unnecessary delay and expense, and their existing powers to decide procedural and evidential matters; or (2) as noted in our previous LawFlash, explicitly under various existing institutional arbitral rules, including the rules of the London Court of International Arbitration and International Centre for Settlement of Investment Disputes.
However, the Report also referenced the existence of “due process paranoia” on the part of arbitrators that manifests as a concern that any award made on the basis of the existing powers may be overturned (or enforcement refused) should parties seek to challenge it on the grounds of a lack of due process.
Accordingly, the Law Commission’s proposal is aimed at increasing arbitrator confidence in swiftly dealing with hopeless cases (or, at minimum, hopeless issues).
THE PROPER LAW OF THE ARBITRATION AGREEMENT
The Law Commission proposes an amendment to the Act (by way of a new Section 6A) that would include an explicit rule for the determination of the law governing an arbitration agreement in the absence of an express selection by the parties.
Debates in relation to this topic often arise where the governing law of the arbitration clause of an agreement does not align with the governing law of the “primary” contract in which the arbitration clause is contained. This has been a particularly vexed issue (and one which divided the Supreme Court in Enka Insaat ve Sanayi AS v OOO Insurance Company Chubb  UKSC 38) where the arbitration clause does not include an express choice of law clause.
In Enka, the Supreme Court’s majority concluded that, where the parties had not expressly chosen the law to govern the arbitration clause, the governing law of the “primary” contract would be taken as the implied choice of law governing the arbitration clause unless this might render the agreement invalid; but if the “primary” contract did not contain a choice of law, the arbitration agreement would be governed by the law with which it is most closely associated (typically the seat of the arbitration).
This multistep analysis has faced criticism over its complexity and unpredictability. The new rule proposed in the Report would replace it with a simpler, non-retrospective rule that provides that
- where the parties have expressly selected the law governing the arbitration agreement, that law will govern the arbitration agreement; and
- where the parties have not expressly selected the law governing the arbitration agreement, the law of the seat will apply (regardless of the governing law of the “primary” contract).
This change is expected to provide greater clarity and reduce the prospect of satellite litigation in circumstances where arbitration clauses do not include an express choice of governing law.
PROCEDURE FOR JURISDICTIONAL CHALLENGES TO AWARDS UNDER SECTION 67
Under Section 67 of the Act, parties to an arbitration may apply to the English High Court to challenge arbitral awards on the basis that the arbitrator(s) lacked substantive jurisdiction to hear the relevant claims. In light of the Supreme Court’s decision in Dallah v Pakistan  UKSC 46, the current practice in the event of such a challenge is for a full de novo rehearing of the matter.
Some commentators have criticised this approach for being inefficient and unfair, seeing as the challenging party has typically had the benefit of already arguing the point before the relevant tribunal. Others have pointed out that the rehearing approach helps safeguard the rights of parties that had not agreed to arbitrate to access the court. Reflecting this debate, the Report highlights that there were many stakeholders both for and against reform of Section 67.
The Law Commission has concluded that the Dallah approach provides appellants with an unjustified “second bite of the cherry.” However, recognising the court access point mentioned above, the Law Commission’s recommended change adopts the approach set out in its second consultation report, which—as something of a compromise—suggests amendments to the Act permitting changes to court rules that would place the following limits on Section 67 challenges:
- The court will not entertain any new grounds of objection or new evidence unless it could not with reasonable diligence have been put before the tribunal.
- Evidence will not be reheard, save in the interest of justice.
The Report recommends expanding arbitrators’ immunity to ensure that arbitrators face no liability in relation to resignations that are not unreasonable (e.g., where an arbitrator may need to resign to avoid breaching sanctions).
The Law Commission also recommends restricting arbitrators’ liability in respect of the costs of applications to courts to remove arbitrators pursuant to Section 24 of the Act so that arbitrators would be liable for those costs only where they have acted in bad faith.
ARBITRATOR DUTY OF DISCLOSURE
The Act presently imposes a duty of impartiality on arbitrators. Linked to this duty, pursuant to existing case law (including the Supreme Court’s decision in Halliburton Company v Chubb Bermuda Insurance Ltd  UKSC 48), an arbitrator has an ongoing duty of disclosure to disclose any matter which may give rise to any justifiable doubts in relation to their impartiality.
The Law Commission recommends the statutory codification of that duty in the Act as a new Section 23A, with the aim of increasing the accessibility of that rule to parties to arbitrations. The Law Commission also recommends the extension of the duty so that it takes effect upon pre-appointment discussions, and proposes that the duty extend to matters within the arbitrator’s actual knowledge and matters of which the arbitrator ought reasonably to be aware.
SECTION 44 COURT ORDERS IN SUPPORT OF ARBITRATIONS
Section 44 of the Act empowers the English High Court to make orders that support arbitrations, including orders for the preservation of evidence and freezing injunctions. There have historically been debates as to whether those powers can be exercised against third parties.
In the Report, the Law Commission recommends amending the Act to explicitly confirm that (1) pursuant to Section 44 the English High Court has the power to make orders against third parties and (2) the English High Court’s consent is not necessary for affected third parties to appeal that decision.
The Report includes a number of welcome changes that recognise the importance of fine-tuning the Act with a view toward maintaining England and Wales’ position as the pre-eminent jurisdiction for international arbitration. At the same time, it is equally welcome that the Law Commission has resisted the temptation to propose extensive reforms to the Act (which can be credited for facilitating that very pre-eminence). As the Report recognised, wholesale reform to the Act was not necessary or desirable.
In asking the Law Commission to review the Act, the UK government’s goal was to ensure that the Act remained “state of the art.” It is clear that the Law Commission’s recommendations, if enacted, are likely to achieve that goal.
The onus now turns to the UK government to decide whether to adopt the Law Commission’s recommendations by way of appropriate legislation. We are likely to see the extent to which this will be the case soon, as Lord Bellamy KC, the Parliamentary Under Secretary of State in the Ministry of Justice, has confirmed that the UK government would issue a response to the Report “shortly.”
Trainee Solicitor Hazem Nakib contributed to this LawFlash.