Faster, Clearer: Law Commission Proposes to Streamline English Arbitration Law

Faster, Clearer: Law Commission Proposes to Streamline English Arbitration Law

September 21, 2023, Covington Alert

On 6 September 2023, following two rounds of consultation papers, the Law Commission of England and Wales published its final report containing its recommendations to reform the Arbitration Act 1996 (the “Act”), draft legislation, and an official summary. The report concluded that there was no need for major reform of arbitration law in England and Wales, but identified several areas where the law could be streamlined or clarified, and accordingly proposed limited amendments to the Act.

This alert reviews the most important proposed changes that might affect England’s attractiveness as a choice of arbitral seat. Overall, the Law Commission’s recommendations represent a pragmatic and welcome modernisation of important aspects of the Act which, if implemented, will help to maintain London’s status as a leading destination for users of international arbitration.

It is black letter law in England that arbitrators have a continuing duty to disclose any circumstances which might reasonably give rise to justifiable doubts about their impartiality (for details, see our Client Alert on Halliburton Company v Chubb Bermuda Insurance Ltd, [2020] UKSC 48). The Law Commission nonetheless recommends putting this rule on a statutory footing to make the rule more apparent and accessible. This is likely to be particularly valuable to arbitrators and parties who are less familiar with England as an arbitral seat.

Existing case law is unclear on the standard of knowledge relevant to an arbitrator’s potential conflicts. Therefore, the Law Commission also recommends clarifying that the duty of disclosure extends not only to circumstances of which the arbitrator is actually aware, but also those of which they ought reasonably to be aware. Writing this broader standard of knowledge into law could affect the conduct of English-seated arbitrations. Where appropriate, arbitrators may be required to conduct a higher level of personal due diligence, notwithstanding the relevant arbitral rules or other customarily-used international guidelines on arbitrator disclosures. However, the Law Commission emphasised that what an arbitrator ought reasonably to know will vary from case to case (and sector to sector). Its proposed reform to the Act aims to strike a balance between resolving the matter at a level of principle, while maintaining a sufficient level of flexibility to enable the courts, and arbitral rules, to adopt nuanced requirements in different situations.

Notably, the Law Commission has expressly declined to recommend enhancing or codifying arbitrators’ duties of independence. The Law Commission recognises that, in essence, arbitration is (particularly in certain specific sectors such as shipping and insurance) a reasonably niche field with a lot of repeat players. Given this reality, achieving “perfect independence” may not always be possible. In other words, the proposed regime would require extensive disclosures by arbitrators, but in many cases these disclosures should not lead to actionable concerns about an arbitrator’s bias.

Key takeaways

• Under the proposed changes, arbitrator disclosures of potential conflicts are likely to become more comprehensive and may require a greater level of inquiry by an arbitrator.
• The strengthening of the disclosure regime is structured in such a way that it will not necessarily result in an increase in bias or impartiality challenges to arbitrators.

Summary Disposal

The Law Commission has proposed the introduction in the Act of an express rule allowing the summary disposal of claims that have no real prospect of success, unless the parties agree otherwise.

This provision has long been demanded, with many industries seeing it as crucial to using arbitration over litigation. The Act’s current lack of clarity over the availability of a summary disposal mechanism has resulted in inconsistent High Court decisions.[1]

The reform will provide certainty to arbitral tribunals seated in England and Wales that they may summarily dispose of a case, without their decision later being overturned. As a result, once the proposal is properly implemented, there likely will be increased use of summary disposal – and a corresponding reduction in the average length of proceedings.

Key takeaways

• If implemented, England will likely see increased instances of arbitral claims being resolved on a summary basis – potentially significantly speeding up the resolution of many claims, reducing expense and uncertainty for litigants.

Jurisdictional Challenges

The Law Commission has proposed a raft of reforms to limit the procedural scope of challenges in court to tribunals ruling on their own jurisdiction, under section 67 of the Act. For example, the Law Commission recommends that in a section 67 challenge by a party to the proceedings: (i) the court will not entertain any new grounds of objection or any new evidence, unless even with reasonable diligence it could not have been put before the tribunal; and (ii) the court will not rehear evidence, save in the interests of justice. Similarly, a section 32 application for the court to determine a question as to the substantive jurisdiction of the tribunal is now only available as an alternative to the tribunal ruling on its jurisdiction. In contrast, no changes have been made to challenges to foreign awards under section 103.

The Law Commission also has recommended explicitly providing that a tribunal may make an award on costs even if the tribunal or the court finds that the tribunal does not have jurisdiction. This ensures that a losing party does not avoid the costs of an arbitration it triggered.

Key takeaways

• If the Law Commission’s reforms are implemented, challenges before the courts to a tribunal’s jurisdiction will typically be shorter and less evidence-heavy.

The Governing Law of an Arbitration Agreement

The Law Commission has proposed a change to how the law of the arbitration agreement is decided under English law. It recommends the introduction of a new default rule, providing that the arbitration agreement is governed by the law of the seat, unless the parties expressly agree otherwise.

The Act currently does not state what law should apply to the arbitration agreement. Instead, it was previously left to the courts to decide their own method, which the UK Supreme Court (the “UKSC”) did in Enka v Chubb [2020] UKSC 38. The UKSC decided that, absent an express choice of law governing the arbitration agreement, the choice of governing law for the underlying contract generally applies to the arbitration agreement (subject to limited exceptions). Absent any choice of governing law, the arbitration agreement is governed by the law with which it is most closely connected.

The UKSC’s decision in Enka v Chubb proved controversial amongst international arbitration practitioners because it often created uncertainty as to the applicable law. Furthermore, the UKSC diverged from other national courts in its approach to determining the law applicable to the arbitration agreement, therefore creating the opportunity for parties to ‘forum shop’.

The Law Commission’s proposed default rule is clear and simple, representing a departure from the UKSC’s decision. The Law Commission’s proposed default rule is supported by the UK’s leading associations of commercial barristers and solicitors, including the Commercial Bar Association, the Bar Council, and the City of London Law Society.

Clients should note that the rule proposed by the Law Commission would apply only prospectively to arbitration agreements put in place after the legislation enters into force, and would not apply retrospectively to pre-existing arbitration agreements. 

Key takeaways

• Currently, the chosen governing law of the underlying contract will usually govern the arbitration clause (where not otherwise expressly agreed by the parties). This can mean that the law of the arbitration agreement and the law of the seat differ.
• If the Law Commission’s proposals are adopted, the law governing arbitration agreements will be more clear-cut: the law of the seat will be the law of the arbitration agreement, unless the arbitration agreement expressly states otherwise.

After careful consideration of a range of reforms to the courts’ powers to support arbitral proceedings, the Law Commission ultimately has only recommended amendment in two respects, both of which relate to courts’ powers to make orders against non-parties to an arbitration:

1. Applicability to third parties: to clear up some ambiguity in the case law, the Law Commission has recommended that section 44 (which lists several types of orders the court can grant, including but not limited to the taking and preservation of evidence, and orders relating to property which is the subject of the proceedings) be amended to expressly state that these orders may be made against non-parties to the arbitration.
2. Rights of appeal of third parties: under section 44(7) of the Act, court orders made under section 44 are appealable only with permission from the court that made the order – a narrower right of appeal than usual. While this position minimises ‘distractions’ to the main arbitral proceedings, it sits uncomfortably alongside the proposed clarification that section 44 powers may be exercised against non-parties. Consider a third party possessing relevant evidence, who knows nothing of the arbitration agreement or an ongoing dispute, but is drawn into the dispute under section 44. In its current state, the Act would limit this third party’s rights of appeal simply because the underlying dispute is subject to arbitration. The Law Commission has addressed this issue by proposing an exception for third parties, who would still have full rights of appeal.

Courts supporting arbitral proceedings occasionally struggle with non-signatory and third-party issues. The Law Commission’s proposals are a welcome attempt to gain certainty in this area. Effective evidence gathering and preservation, property handling, and injunctive powers make England an attractive and expedient seat for arbitration. Clarifying the applicability of these powers to third parties enhances that.

Key takeaways

• The Law Commission’s proposal clarifies that several important court powers, including relating to evidence gathering and preservation, and injunctive relief can be applied to third parties to an arbitration. This should improve the efficacy of interim relief in English-seated arbitrations and make the jurisdiction more attractive as an arbitral seat.
• The reforms also seek to ensure that such third parties do not unduly lose rights of appeal simply because the underlying dispute is being arbitrated rather than litigated. This should maintain confidence in the fairness of the English legal system.

It will now be for the Ministry of Justice (along with other interested UK Government departments) to decide whether to implement any of the Law Commission’s recommendations. If the UK Government accepts the Law Commission’s proposals, it is possible that the legislative process could begin in 2024.

If you have any questions concerning the material discussed in this client alert, please contact the members of our International Arbitration practice.