Arbitration Act amendments put forward by Law Commission

The Bill has been put forward by the Law Commission of England and Wales (198-page / 135MB PDF) following a near year-long review of the existing Arbitration Act 1996, which included two consultation exercises held with stakeholders.

One of the most significant proposals made by the Law Commission in its final report is to stipulate that, unless the parties to arbitral proceedings expressly agree otherwise, the law applicable to the arbitration agreement is the law of the seat of the arbitration. Also set out in the draft legislation are plans to enhance the powers enjoyed by arbitral tribunals and the courts in respect of arbitration proceedings.

The Law Commission said: “We are mindful of the consensus that the Act works well, and that root and branch reform is not needed or wanted. Accordingly, we have confined our recommendations to a few major initiatives, and a very small number of minor corrections.”

The creation of a new “default rule in favour of the law of the seat” was one of the “major” recommendations made by the Law Commission. It said it would result in more arbitration agreements being governed by the law of England and Wales when those arbitrations are also seated in the jurisdiction, while preserving the right of parties to choose an alternative governing law for their arbitration agreement.

Among other things, the Law Commission said the move would deliver “simplicity and certainty” – and avoid “unnecessary cost and delay” arising from potential “satellite arguments” arising in respect of the governing law. The recommendation follows the case of Enka v Chubb in which the UK Supreme Court provided some clarification in relation to English choice of law rules for ascertaining the governing law of an arbitration agreement.

In putting forward other recommendations for reform, the Law Commission cited input it had received to its consultations from Pinsent Masons – including in relation to section 67 of the Arbitration Act.

Section 67 allows a party to arbitral proceedings to challenge an award of a tribunal seated in England and Wales as to its ‘substantive jurisdiction’, or seek a declaration that an award on the merits of a dispute has no effect on the grounds that the tribunal lacked substantive jurisdiction. At present, the position following the Supreme Court’s decision in Dallah v Government of Pakistan is that a section 67 challenge involves a full re-hearing by the court of the jurisdictional objections, which can include a re-examination of the facts – regardless of the tribunal’s findings and irrespective of the arguments which were advanced by the parties in the arbitration.

The Law Commission initially considered that challenges raised under section 67 should be limited to an appeal rather than a full rehearing, but its position “evolved” after Pinsent Masons and others advised that there was good reason not to restrict the ability of the court to re-hear the evidence and arguments in section 67 cases.

In its Bill, the Law Commission has proposed that the courts should be allowed to make rules which allow for new grounds of objection and evidence that were not previously raised before the tribunal to be raised in a section 67 challenge only if the ground or evidence were not known or could not have been discovered with reasonable diligence. These rules would also provide that evidence previously before the tribunal could not be re-heard by the court unless it considers it necessary in the interests of justice.

In relation to section 67 cases, Pinsent Masons had also urged the Law Commission to expand the type of remedies available to the courts to include an option for the courts to remit the award to the tribunal – a suggestion the Law Commission has adopted in its recommendations, citing its potential relevance in cases where, for example, the tribunal had wrongly held that it had no jurisdiction, or where the award is set aside in part.

The Law Commission also advocated changes to the Arbitration Act to provide explicitly that an arbitral tribunal is able to make an award of costs in cases where the tribunal itself has ruled that it has no jurisdiction to rule on the dispute at issue. The Law Commission said: “If … costs are not recoverable, we thought that position unattractive in principle. It would allow a party who wrongly initiated arbitral proceedings to walk away free of consequences, in circumstances where it had triggered the costs of bringing arbitration proceedings in the first place and progressing them to the point of their dismissal. That seems unfair.”

Pinsent Masons’ proposal that the question of costs should be remitted back to the tribunal where the court determines that the tribunal had no jurisdiction was also adopted by the Law Commission, which noted that in circumstances where the court may not have the power to award the costs of the arbitral proceedings, the losing party should not be permitted to avoid said costs simply because the arbitration had been ended by the court’s ruling on jurisdiction rather than the tribunal’s.

Pinsent Masons’ input in relation to other aspects of reform that the Law Commission considered also appears to have been persuasive. For example, the Law Commission endorsed Pinsent Masons’ call to make express provision in the Act confirming that arbitral tribunals have the power to dispose of cases that have no real prospect of success faster, by means of a summary procedure.

The Law Commission also referenced input from Pinsent Masons when it determined that the provisions of the Arbitration Act should not apply directly to emergency arbitrators.

It said: “Some consultees, including the Arbitration Committee of the City of London Law Society, and the Commercial Bar Association, said that, since emergency arbitrators are appointed under the rules of arbitral institutions – and not under any scheme administered by the court – those arbitral rules can make provision to regulate emergency arbitrators. And, said Pinsent Masons LLP, any emergency arbitrator will be superseded by the main arbitral tribunal, which is subject to the full scope of the Act, and which will review the orders of the emergency arbitrator. We are persuaded that, if emergency arbitrators are appointed under arbitral rules, those arbitral rules are the better place to regulate emergency arbitrators. It is sufficient that orders made by emergency arbitrators are temporary and reversible by the full tribunal which is regulated by the Act.”

Among the other measures contained in the Bill are provisions designed to codify prospective arbitrators’ duties of disclosure in the interests of ensuring impartiality. Those individuals would, when approached in connection with their possible appointment as an arbitrator, as soon as reasonably practical, be obliged to disclose “circumstances that might reasonably give rise to justifiable doubts as to the individual’s impartiality in relation to the proceedings, or potential proceedings, concerned” when they “ought reasonably to be aware” of those circumstances.

The Bill also proposes amendments to the provisions clarifying the limits of arbitrator immunity, which should provide comfort for those appointed to sit on tribunals. The measures, if adopted, would exclude liability for an arbitrator who resigns unless the resignation is unreasonable, and would also require that a party to the arbitral proceedings applies for an order as to the arbitrator’s entitlement to fees and expenses, as opposed to the current position in which the arbitrator is required to make an application to court. The proposals would also reverse the existing approach adopted in a line of case law on an arbitrator’s liability for the costs of an application for removal brought by a party to the arbitration, with liability only attaching if the conduct of the arbitrator giving rise to the removal application is in bad faith.

The Arbitration Act 1996 applies in England, Wales and Northern Ireland, but the Law Commission’s proposals are concerned solely with the law in England and Wales. It said it hopes the UK government will endorse its recommendations in respect of Northern Ireland in addition to England and Wales.

Michael Cottrell of Pinsent Masons, who coordinated the firm’s response to the Law Commission’s consultations, said: “The Law Commission’s final report and legislative proposals achieve its aim of updating the Arbitration Act to keep it relevant whilst maintaining the overall balance between party autonomy and judicial supervision which contributes to London’s continued appeal as a global centre for arbitration.”

International arbitration expert Sylvia Tonova, also of Pinsent Masons, said: “In particular, the proposals concerning the law applicable to the arbitration agreement will introduce much-needed clarity, which should reduce the potential for unnecessary and costly satellite litigation on this issue, whilst the suggested compromise on the nature of section 67 challenges is a welcome development."

Cottrell added: "Hopefully the pragmatism of the Law Commission’s proposals, coupled with the broad consensus which they have engendered amongst the arbitration community, will contribute towards the swift adoption of the Law Commission’s draft Bill by the government.”