Law Commission Review of the Arbitration Act 1996 | Key Areas of Review and Recommended Change

What is the existing position?

The doctrine of separability under English law means that an arbitration clause is separate from the underlying agreement.  The principles that currently apply to determine the law applicable to the arbitration agreement (as distinct from the main contract) are set out in the Supreme Court decision of Enka Insaat vs Sanayi AS v OOO Insurance Company Chubb [2020] UKSC 38.  An overview of this landmark decision can be found here: Arbitration agreements: Governing law. 

In summary, absent an express choice by the parties, the governing law of an arbitration agreement will be the parties' choice of law to govern the main contract; or if there is no choice of law for the main contract, the arbitration will be governed by the law it is most closely connected to (usually the seat of the arbitration).

The debate around change

A more detailed overview of the key considerations surrounding the proposed reform can be found in our previous article: Which law governs an arbitration agreement under English law? What do you need to know?

In short, in addition to the complexity of the current position, a key criticism of Enka v Chubb is that parties may find themselves subject to certain aspects of foreign arbitration law (as the law governing the arbitration clause), even though the arbitration is seated in England and Wales. This can lead to inconsistencies and uncertainty, as foreign law may take a different approach to significant principles applicable under English law such as arbitrability, separability, scope and confidentiality.

The Law Commission's final recommendation

The Law Commission's final recommendation (reflected in clause 1 of the draft Bill) is that the Act be amended to provide that the arbitration agreement is governed by the law of the seat, unless the parties expressly agree otherwise.

There has been some debate as to whether this rule should have retrospective effect.  The Law Commission originally recommended that the new rule would only apply to arbitration agreements entered into once the amended Act comes into force, which would result in differing positions depending on when the arbitration agreement was concluded, which could be confusing. However, the Law Commission has since amended the draft bill so that it "now provides that its changes do not apply to arbitrations that have already commenced, as distinct from existing arbitration agreements".  As a result, the changes would eliminate the dual position that would apply under the original draft bill. The new bill would clearly delineate by reference to the amended Act coming into force - it would not apply to arbitrations commenced prior to the amended Act coming into force – and therefore Enka v Chub would not apply after that date.

What is the existing position?

The Act does not contain any provisions on confidentiality.  But, a duty of confidentiality in relation to arbitrations can arise in other ways.  For instance, the parties might expressly agree confidentiality, it might apply by virtue of the parties' choice of arbitral rules, or it could be an implied term of the arbitration agreement (as it is under English law).  However, confidentiality is not absolute and there are limits to confidentiality in arbitration (see, for example, Emmott v Michael Wilson & Partners).

The debate around change

The Law Commission considered whether the Act should in fact contain express provisions on confidentiality in arbitration.  In its first consultation, the Law Commission provisionally concluded that it should not.  The majority of consultees agreed with that position, but a significant number (including Travers Smith) were in favour of codification and a stipulation that arbitrations are confidential by default, with a non-exhaustive list of exceptions.  It was felt that such codification would provide reassurance to international users of arbitration of greatly valued confidentiality.

The Law Commission's final recommendation

The Law Commission recognised the importance of confidentiality to many users of arbitration, but concluded that the Act should not contain a default provision.  This conclusion was based on several factors.  First, notwithstanding the importance of confidentiality to users, the Law Commission noted that parties are free to agree confidentiality themselves without the need for statutory protection.  Second, there is no one size fits all approach as different rules can apply in different contexts (for example, investor state arbitrations favour transparency).  Third, there are a wide variety of approaches, which can apply on a range of legal bases; a single statutory rule could not reflect this variety.  Fourth, any rule would have to be subject to exceptions, but that list is currently non-exhaustive and is developing and so codifying the position would be very difficult. Therefore, the Law Commission concluded that a statutory rule would not be sufficiently comprehensive, nuanced or future-proof. They favoured the development of the law by the courts (alongside the arbitral rules) and therefore made no recommendation for reform.

The existing position and the debate around change

The Act does not contain any provisions on discrimination.  In its first consultation paper, the Law Commission noted statistics which show that women are up to three times less likely to be appointed as arbitrators than men.  In a 2011 decision, the Supreme Court had also held that the (then-applicable) Employment Equality (Religion or Belief) Regulations 2003 did not apply to the appointment of arbitrators, because they are not employees of, nor in a subordinate position to, the arbitral parties (these Regulations were revoked and replaced by similar rules in the Equality Act 2010).  In 2016, a Private Member's Bill was introduced which would have amended the Act and Equality Act (inter alia) to prohibit various forms of discrimination on the grounds of sex.  That Bill was not passed. 

Against this backdrop, the Law Commission proposed in its first consultation paper that discriminatory terms for the appointment of arbitrators in an arbitration agreement should be unenforceable.  In its second consultation paper, the Law Commission proposed an exception for terms which required an arbitrator to have a neutral nationality (in response to feedback).  The Law Commission also asked whether discrimination in arbitration should be prohibited more generally.

The Law Commission's final recommendation

The Law Commission ultimately has not recommended any prohibition on discrimination in the Act, concluding that this would not improve diversity of arbitral appointments, and could lead to unwarranted satellite litigation and challenges to awards.

The Law Commission's recommendation reflects concern from consultees who did not generally oppose prohibiting discrimination in principle, but submitted that such a prohibition could have negative practical consequences. Of particular concern was the potential for disingenuous parties to opportunistically leverage the prohibition to hamper and delay arbitral proceedings, or avoid an adverse award.  Consultees also questioned the desirability of an exception for neutral nationality requirements, because this might imply that an arbitrator of a non-neutral nationality is not impartial, and could lead to satellite litigation about whether an arbitrator falls within the exception.

The Law Commission noted that various existing laws provide protection against discrimination in arbitration.  For example, various prohibitions on discrimination in the Equality Act 2010 may apply to arbitral institutions.  Contractual terms, including arbitration agreements, may be unenforceable insofar as they promote treatment prohibited by the Equality Act.  Arbitrators themselves are subject to a duty to act fairly and impartially, which means acting without discrimination.

What is the existing position?

The Act already contains an express duty of impartiality (section 33) and provides that an arbitrator can be removed by the court if there are justifiable doubts as to their impartiality (section 24). Currently there are no express duties of independence or disclosure imposed on arbitrators in the Act.  However, the issue of disclosures was addressed in Halliburton Co v Chubb Bermuda Insurance Ltd [2020] UKSC 48.

The debate around change

The Law Commission mooted (without proposing) an express duty of independence (as distinct from impartiality) in their first consultation paper. They noted an equivalent express duty of independence in the UNCITRAL Model Law (Article 12(1)) and in some arbitral rules (e.g., Article 11 of the ICC Rules). However, they considered that: (i) the initial omission of an express duty in the Act was a deliberate decision; and (ii) complete independence may be impossible to achieve from a practical perspective, given that certain sectors require expertise from arbitrators which in turn increases the chances that they will have encountered other professionals in their field.

The Law Commission proposed that arbitrators should be subject to a statutory duty of disclosure, as: (i) even without a duty of independence, arbitrators may need to disclose connections to demonstrate impartiality; (ii) a duty of disclosure appears in the UNCITRAL Model Law (Article 12(1)) and in some foreign legislation and some arbitral rules; and (iii) arbitrators are already under a common law duty of disclosure as a result of Halliburton Co v Chubb. The principal objection came from a group of specialist organisations, who were concerned that a statutory duty would depart from the common law duty in Halliburton v Chubb. 

The Law Commission's final recommendation

The Law Commission has made no recommendation for reform as regards a statutory duty of independence, which 63 of the 78 consultees agreed with. The Law Commission decided that complete independence is not possible or practicable, and that ultimately what matters is that the arbitrator is impartial and is seen to be impartial.

The Law Commission has recommended a statutory duty of disclosure be introduced, on the basis that disclosure: (i) is a demonstration of an arbitrator's impartiality, and (ii) helps address the potential unfairness of informational asymmetry. 65 of the 83 consultees agreed that such a step would provide clarity and stress the importance of disclosure to the perception of impartiality. As to the status of knowledge required to give rise to a disclosure, the Law Commission has also recommended that an arbitrator should be under a duty to disclose what they actually know and what they ought reasonably to know.

What is the existing position?

The English courts may decide a claim or an issue without the need for a full trial when it considers that the relevant party has no real prospect of succeeding on that issue and there is no other compelling reason why the issue should be disposed of at trial.  In recent years, arbitral institutions have updated their rules to allow for a similar process in arbitration (see, for example, Rule 22.1(viii) of the LCIA Rules 2020).  However, the Act does not contain any express provisions allowing for summary disposal.

The debate around change

Under section 33 of the Act, a tribunal is under a duty to give each party a reasonable opportunity to put their case.  In addition, one of the grounds under which recognition and enforcement of an award may be refused under the New York Convention is that the party was unable to present their case (see Article V(1)(a)).  Therefore, the absence of express provisions in the Act allowing for summary disposal has led to "due process paranoia" amongst some arbitrators.  In short, some fear that dealing with arbitrations (or issues) in a summary manner may run contrary to the relevant parts of the Act and New York Convention.  The Law Commission concluded that if the Act expressly permits summary disposal, this might reassure arbitrators and enforcing courts.

The Law Commission's final recommendation

First, the Law Commission considered whether summary disposal should be mandatory or optional.  It has proposed that summary disposal should be subject to the contrary agreement of the parties and should be available only on the application of a party (i.e. not of a tribunal's own volition).  Second, the Law Commission considered the procedure for summary disposal.  It has proposed that the procedure to be adopted should be a matter for the tribunal, having consulted with the parties.  Third, the Law Commission considered whether the legislation should stipulate the threshold for summary disposal and, if so, what that threshold should be.  In particular, the Law Commission considered the approach of the English courts (i.e. the relevant party has "no real prospect of success" and "no other compelling reason") versus that used in several arbitral rules (i.e. "manifestly without merit").  The Law Commission has proposed that the legislation should stipulate the threshold for summary disposal and that, subject to the parties agreeing otherwise, it should be "no real prospect of success" (the meaning of which, on account of it being applied in the English courts, has the benefit of being explained in case law).

What is the existing position?

Section 29 of the Act provides that arbitrators (and their employees or agents) are not liable for acts or omissions in the discharge or purported discharge of their functions as arbitrator, unless the acts or omissions are shown to have been in bad faith. There are two key exceptions to this immunity. First, liability incurred by the arbitrator by reason of their resigning is excluded. Where an arbitrator resigns, it may instead apply to court to grant it relief from liability, which the court may do if it considers the resignation reasonable. Second, the courts have previously held that arbitrators may be liable for the costs of applications under section 24 of the Act for their removal (even where such applications are unsuccessful).

The debate around change

In respect of the resignation exception, the Law Commission sought input as to whether arbitrators should incur liability for resignation at all and/or only if the resignation is proved to be unreasonable. The majority of consultees were of the view that arbitrators should incur some form of liability for resignation, but agreed with the proposed limitation that the resignation must be shown to be unreasonable for liability to occur.

In respect of the liability for costs exception, the Law Commission considered that the case law might be wrong as a matter of statutory construction, and proposed that immunity be extended to cover (in broad terms) the costs of court proceedings arising out of the arbitration, such as applications to remove an arbitrator. The majority of consultees agreed with the proposal, although some considered arbitrators should potentially incur liability for costs if they are actively resisting the application for removal. Further, it was considered that the Law Commission's proposal was too broad, and should not extend, for example, to cases where arbitrators sue for their own fees or where they have acted in bad faith.

The Law Commission's final recommendation

The Law Commission ultimately recommended that arbitrator immunity should be extended to cover liability resulting from: (i) an arbitrator's resignation (unless the resignation is shown to be unreasonable); and (ii) an application under section 24 for that arbitrator's removal (unless the arbitrator has acted in bad faith). The latter represented a narrower recommendation than originally proposed since the Law Commission agreed that the extension of the immunity should be confined to applications under section 24 and should not apply to cases where arbitrators have acted in bad faith (in order to align with the existing wording of section 29).

What is the existing position?

Section 44 of the Act sets out the powers that a court can exercise in support of arbitral proceedings, such as powers to make orders for the taking of witness evidence, the preservation of evidence, sale of goods, interim injunctions and the appointment of a receiver.

The debate around change

Orders under section 44 can be made against arbitral parties, but the position is uncertain as to whether third parties can also be bound. If so, it is also deemed unclear as to whether those third parties have a curtailed right of appeal, given that (pursuant to s.44(7)) permission to appeal must be obtained from the court appealed from.

In addition, the Law Commission asked in its first report whether s.44(5) (that courts shall only act if or to the extent that the arbitral tribunal has no power or is unable at that time to act effectively) ought to be repealed, and, if so, why. The two potential issues identified were: (i) the perception, following Gerald Metals SA v Timis [2016] EWHC 2327 (Ch), that s.44(5) precluded an arbitral party applying to court under s.44 where emergency arbitrator provisions were available, and (ii) whether s.44(5) was redundant considering separate requirements already set out in ss.44(3) and (4).

The Law Commission's final recommendation

To provide clarity, the Law Commission has recommended s.44 of the Act be amended to confirm that: (i) court orders thereunder can be made against third parties, but (ii) the requirement for the court's consent to an appeal of a decision made under s.44 should not apply to third parties, who should have the usual rights of appeal (i.e. to include the right to seek permission from the court being appealed to). On the latter, the Law Commission (and most consultees) felt it was unfair to cut down a third party's usual right of appeal given they never agreed to arbitration and will not appear before the arbitral tribunal to re-argue the order.

In line with most consultees, the Law Commission has made no recommendation for reform to s.44(5). Ultimately the current wording of s.44 already allows an arbitral party to apply to court, even if emergency arbitrator provisions have been agreed, so long as the requirements of s.44 are fulfilled, and Gerald Metals does not say otherwise. In addition, whether or not s.44(5) adds significantly to the practical requirements of ss.44(3) and (4), it has value as a statement of principle that court intervention in arbitral proceedings should be less rather than more.

What is the existing position?

The Act currently has no provisions addressing emergency arbitrators, as the introduction of emergency arbitrators as a practice post-dates the Act.  Instead, such powers are usually provided by institutional arbitral rules.

The debate around change

In its first report, the Law Commission provisionally concluded against introducing a statutory scheme of emergency arbitrators to be administered by the court, as typically arbitral institutions manage this process well enough.

The Law Commission also provisionally concluded against clarifying that the provisions of the Act should apply generally to emergency arbitrators. 

Finally, the Law Commission considered amendments might be required to address a situation in which an interim order made by an emergency arbitrator is ignored by an arbitral party. Possible amendments included: (i) a provision empowering an emergency arbitrator to issue a peremptory order which, if still ignored, might result in the court ordering compliance; or (ii) an emergency arbitrator being permitted to give permission for a s.44 application.

The Law Commission's final recommendation

In line with the views of all but one consultee, the Law Commission has made no recommendation to introduce a scheme of emergency arbitrators to be administered by the court. The Law Commission felt that the arbitral institutions themselves are much better placed to manage the process than the courts, and the well-developed rules already in place are sufficient.

The Law Commission has also maintained its decision that the provisions of the Act should not apply generally to emergency arbitrators. Certain sections cannot apply to both normal and emergency arbitrators (for example s.16 setting out a default procedure for the appointment of the arbitral tribunal, the timescale for which would be too long for an emergency arbitrator). Arbitral rules appointing emergency arbitrators 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 then regulated by the Act in full).

The consultees were divided as to which amendment should be implemented to address circumstances where an emergency arbitrator's order was ignored. Ultimately the Law Commission decided that there was no downside to introducing both amendments, especially given that normal arbitrators currently have both pathways open to them.

What is the existing position?

Under section 67 of the Act, a party may apply to the court to challenge a tribunal's award on the basis that the tribunal lacked substantive jurisdiction.  In addition to challenging an actual award, parties do have other rights of challenge, most notably under section 32 of the Act and under the principle of "competence-competence" (which is the ability of a tribunal to determine its own jurisdiction).  An award of the tribunal as to its own jurisdiction can itself be challenged before the court under section 67.  In relation to the scope of the challenge under section 67, the Supreme Court ruled in Dallah [2010] UKSC 46, [2011] 1 AC 763 that any such challenge is potentially by way of a full rehearing (i.e. as distinct from a review or appeal of the tribunal's decision and the matters raised by the parties).

The debate around change

The Law Commission considered whether it is right that a challenge under section 67 should be by way of full rehearing.  In its first consultation paper, the Law Commission was concerned with a situation where the objecting party had participated in the arbitral proceedings and there had been full hearing before the tribunal.  It proposed that the subsequent challenge under section 67 should be by way of an appeal, not a full rehearing.  The Law Commission cited two reasons to support its proposal: (i) the delay and cost caused by the repetition of a full rehearing; and (ii) issues of fairness (for instance, being able to run new arguments on the second attempt).  For situations in which the objecting party had not participated in the proceedings, it made no suggested changes to section 67 because that would be their first challenge and there would be no issues of repetition of fairness.

Those who agreed with the proposal often cited the risk of a full rehearing being wasteful and unfair.  Those who disagreed with the proposal cited a number of issues, such as: confusion around the use of the word "appeal" and that reform would mean the UK is out of step with other jurisdictions on this issue, and noted that the court can already control what evidence goes before it.

The Law Commission's final recommendation

In its final recommendation, the Law Commission accepted the criticism around the choice of language and thought it was better to focus not on the label of appeal/review/rehearing, but instead focus on the practical constraints of any challenge under section 67.  The Law Commission concluded that a full rehearing should not be permitted, but the precise scope of a review under section 67 should be determined by rules of court by implementing the following - 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 who has taken part in the arbitral 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) evidence will not be reheard, save in the interests of justice.

What is the existing position?

Under section 69 of the Act, a party can appeal an arbitral award to the court on a point of law. Under section 69(2), an appeal requires either the agreement of all the arbitral parties, or the permission of the court. The court will only give permission if, among other things, the decision of the tribunal is obviously wrong, or is open to serious doubt on a question of general public importance.

Section 69 is currently "opt-out"; in other words, the parties can agree that an appeal should be unavailable. Some arbitral rules do indeed opt out; others do not, and indeed some are explicit about the availability of an appeal under section 69.

The debate around change

In the Law Commission's first consultation paper, it considered whether section 69 might be reformed. The Law Commission noted the tension between two competing goals: (i) enhancing the finality of arbitral awards, which would tend towards limiting appeals; and (ii) the consistent application of the law, which would tend towards enabling appeals.

The Law Commission noted, statistically, that section 69 does supply a flow of cases to the courts, but perhaps representing 1% of arbitrations, of which perhaps 10% reach the Court of Appeal.

The Law Commission's final recommendation

Overall, and following a consultation in which 66 respondents out of 80 agreed with its provisional conclusion, the Law Commission concluded that section 69 is a "defensible compromise" between promoting the finality of arbitral awards (by limiting appeals) and correcting blatant errors of law. It therefore made no recommendation to reform section 69.

The Law Commission noted that section 69 is "opt-out", and stated that "we do not wish to unsettle the preferred relationship with section 69 that has been struck by arbitral rules and arbitration clauses".

The Law Commission noted, in reaching its final recommendation, that the majority of consultees were also against reform and that, amongst the minority who did favour reform, "there is no consensus on what shape that reform should take".