UK Law Commission Publishes Second Consultation Paper for Review of Arbitration Act 1996

The comment period for the UK Law Commission’s most recent review of the Arbitration Act 1996 is now open—the Commission seeks comments on such topics as choice of law, Section 67 award challenges, and potential arbitrator discrimination.

On 27 March 2023, the UK Law Commission published its second consultation paper on the review of the Arbitration Act 1996. Following the responses to the first consultation paper, which we have previously covered, the second consultation paper addressed

• the proper law of the arbitration agreement,
• the procedure for jurisdictional challenges to awards under Section 67 of the act, and
• discrimination in arbitrator appointments.

The Proper Law of the Arbitration Agreement

While the selection of proper law for an arbitration agreement was not addressed in the first consultation paper, in light of the responses received for the first paper, the Law Commission has now reconsidered the issue of which law governs an arbitration agreement where the arbitration agreement fails to expressly state a choice.

The question of the proper law of an arbitration agreement in the absence of an express choice was the subject of the UK Supreme Court’s decision in Enka v. Chubb [2020] UKSC 38. The Supreme Court held that in the absence of an express choice, the choice of law to govern the main contract is the default choice of law for the arbitration agreement, and further established a set of principles to determine the governing law of the arbitration agreement.

The Law Commission noted that the process set out in Enka is complex, and its application in any given case could leave room for argument. One problem identified is the resulting governance of arbitration agreements by foreign law where an arbitration seat is in England and Wales but there is a foreign choice of law clause. The applicability of foreign law would “oust” English and Welsh law on important aspects including separability, arbitrability, scope, and confidentiality.

The Law Commission concluded that, for certainty and practical utility, reform is advisable and proposed the introduction of a new statutory rule in the act that states “the law of the arbitration agreement is the law of the seat, unless the parties expressly agree otherwise in the arbitration agreement itself.”

Procedure for Jurisdictional Challenges to Awards Under Section 67

Under Section 67 of the act, parties can apply to the court to challenge an arbitral tribunal award on the basis that the tribunal lacks substantive jurisdiction, resulting in a full rehearing rather than an appeal. The Law Commission has developed its thoughts from the first consultation paper, wherein it proposed that any subsequent Section 67 challenge should be by way of an appeal and not a rehearing.

The responses received expressed strong views, and as such the new proposal has evolved to include practical limits for a Section 67 challenge by way of amendments to the act. For a Section 67 challenge, where an objection has been made to the tribunal that it lacks jurisdiction, and the tribunal has ruled on its jurisdiction, then, in any subsequent Section 67 challenge by a party that has participated in the arbitral proceedings,

• the court will not entertain any new grounds of objection or new evidence unless, even with reasonable diligence, the grounds could not have been advanced or the evidence could not have been submitted before the tribunal;
• evidence will not be reheard, save exceptionally in the interests of justice; and
• the court will allow the challenge where the decision of the tribunal on its jurisdiction was wrong.

The Law Commission, aware of the divisiveness of its proposal, has suggested a “softer” type of reform to be implemented through courts’ rules, allowing the proposals to be piloted, tested, and amended if necessary.

Discrimination

The first consultation paper dealt with the issue of discrimination in the context of arbitrator appointments. The paper had proposed amending the act so that a term in an arbitration agreement which requires an arbitrator to be appointed by reference to a protected characteristic shall be unenforceable, unless that protected characteristic can be justified as a proportionate means of achieving a legitimate aim.

The second consultation paper retained the proposal and statement that it should always be deemed justifiable to require appointing an arbitrator of a different nationality to the arbitral parties as it supports the “appearance of impartiality.” The Law Commission further expands its thinking and focus on discrimination beyond arbitrator appointments. It is inviting responses on whether discrimination should be generally prohibited in the context of arbitration and, if so, what remedies should be used when discrimination occurs in arbitration.

Next Steps

The proposals made in the second consultation paper are provisional and subject to a formal consultation exercise. The Law Commission invites responses by interested parties by 22 May 2023, after which time the responses will be used to prepare final proposals to Parliament.