UK: The Law Commission's Second Consultation Paper – An Evolving Approach

This week the Law Commission published a second Consultation Paper as part of its review of the English Arbitration Act (the Act).

The Paper raises three issues for consultation: (1) how the proper law of the arbitration agreement should be determined under English law; (2) the procedure for jurisdictional challenges before the English court under section 67 of the Act; and (3) tackling discrimination in arbitral appointments and procedure.

Issue (1) was not addressed by the Law Commission in its first Consultation Paper. However, thirty-one responses raised this as something that was in need of review and potential reform. Although issues (2) and (3) were addressed in the first Consultation Paper, the Law Commission's thinking on these topics has developed following the initial round of responses. As a consequence, it has taken the opportunity to tweak its original proposals and, in the case of issue (3) on discrimination, identify new topics of potential reform. We set out below a summary of the new proposals and questions raised by the Law Commission.

Proper law of the arbitration agreement

The proper law of the arbitration agreement governs the validity and scope of the arbitration agreement, including questions of arbitrability. It is important because an arbitration agreement can be governed by a law that is different from the matrix contract in which it is contained. It is possible (and good practice) for parties to agree which law governs the arbitration agreement and record this in their arbitration clause. However, it is rare for parties to do so.

If adopted, the Law Commission's new proposal would constitute a departure from the Supreme Court's decision in Enka Insaat ve Sanayi AS v OOO Insurance Company Chubb [2020] UKSC 38, [2020] 1 WLR 4117 (Enka) (for a summary of the decision in that case, see our blogpost here). In Enka, which is a lengthy and complicated judgment, the Supreme Court held that where an arbitration clause forms part of a matrix contract, absent an express choice of governing law for an arbitration clause, an express or implied choice of governing law for the matrix contract will also apply to the arbitration clause. This is subject to a number of exceptions (such as where the law of the seat provides that the arbitration agreement is governed by the law of the seat, or where there is a serious risk that the chosen law might render the arbitration agreement invalid). In reaching its decision, the Supreme Court considered that most commercial parties will have an expectation that the law they have chosen to govern their contract governs all of its terms, including the arbitration clause.

The reaction to Enka within the English arbitration community has been mixed, as is very clearly demonstrated by the responses to the second Consultation Paper. The Law Commission identified a number of criticisms of the judgment. These included (1) that the law of the seat is the natural law to govern the arbitration agreement, because the parties have chosen this jurisdiction to apply to the arbitration; and (2) that it results (or will result) in many more arbitration agreements being governed by foreign law rather than English law, because many international contracts provide for an English seat and (3) the approach in Enka is not very accessible to users, who have to wade through very lengthy judgments to understand the position.

The Law Commission has concluded that on balance, the arguments in favour of reform are more persuasive than those against it. It says that the proposed new rule, applying the law of the seat as the governing law of the arbitration agreement, has the virtues of simplicity and certainty. Amongst others, it would see more arbitration agreements governed by the law of England and Wales due to the popularity of London as a seat. Removing uncertainty as to which law governs an arbitration agreement also leaves little opportunity for argument which may prevent satellite litigation. It would also give effect to the English law doctrine of separability and the English rules on arbitrability.

This is a thorny and divisive issue. Although this proposal will not satisfy all stakeholders, it is nonetheless a pragmatic and clear one, and it will be interesting to see the proportion of consultees who agree with it.

Challenges to awards under section 67 of the English Act

Section 67 of the English Act enables parties to challenge an arbitral award before the English courts on the basis that an English seated arbitral tribunal lacks jurisdiction. In the first Consultation Paper, the Law Commission provisionally proposed that where a party has participated in arbitral proceedings, pursued a jurisdictional objection which the tribunal has ruled on and then challenges that ruling before the Court under s67, that the challenge should be by way of an appeal rather than a rehearing. This was intended to mean that the court would be limited to a review of the tribunal's decision rather than a fresh hearing, the rationale being to prevent delay and cost through duplication.

However, many responses to the original consultation criticised the use of the words "appeal" by the Law Commission in this context. As a consequence, the Law Commission has clarified its intentions and sought to identify what the practical constraints to a challenge under section 67 should be.

The Law Commission has reconfirmed that the above proposal would not apply to a party who has not participated in arbitral proceedings – in such situation, the proposed limitations would not apply.

The Law Commission has also noted that its proposals for s67 have divided opinion. As a consequence, it has proposed to soften this proposal by implementing it through court rules rather than through amendment of the Act, commenting that this might allow these proposals "to be piloted and amended (whether tightened or relaxed) should that prove necessary". It will be interesting to see whether this is more palatable to those who objected to the original proposal, though equally the suggestion that the above proposal will not necessarily benefit from finality may not be welcomed either.

Discrimination

The first Consultation Paper raised the issue of discrimination in the appointment of arbitrators. It provisionally proposed that a term which requires an arbitrator to have a protected characteristic under the English Equality Act 2010 in order to be appointed will be unenforceable, unless that requirement can be justified as a proportionate means of achieving a legitimate aim.

The Law Commission has listened to the responses to the original consultation that excluding an arbitrator of the same nationality as any arbitral party to avoid any perception of bias can continue to be permitted.

This is a welcome development given that nationality is a "protected characteristic" under the English Equality Act. It will ensure that the common practice of parties choosing an arbitrator with a different nationality can continue, thereby protecting neutrality.

Following feedback that discrimination can apply generally to the conduct of the arbitration, the Law Commission has suggested a broader focus on discrimination than simply the appointment of arbitrators. Accordingly, it has also asked whether (1) discrimination should be generally prohibited in the context of arbitration and (2) if so, what the remedies should be. This is a complicated topic that will require consideration of the existing framework and safeguards that exist to prevent discrimination, such as challenge and removal of arbitrators, challenges on the basis of procedural irregularity and the ability to prevent enforcement where it would be contrary to public policy.

Comment

The Law Commission has asked consultees to respond to the paper by 22 May 2023, after which it will prepare its final report and recommendations. HSF has actively participated in the consultation process and will be responding to the consultation paper in due course.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.