Law Commission publishes Final Report and draft Bill for amendments to the English Arbitration Act

The Law Commission today published its much anticipated Final Report on the English Arbitration Act (the Act), accompanied by a draft Bill. Although the Law Commission has emphasised that "root and branch reform is not needed or wanted", the report nonetheless makes several significant recommendations for change and proposes other more minor amendments. The main recommendations are as follows:

• Codifying an arbitrator’s duty of disclosure
• Strengthening arbitrator immunity around resignation and removal
• Introducing a power of summary disposal
• Improving the framework and procedure for challenges under section 67
• Introducing a new rule regarding the governing law of an arbitration agreement
• Clarifying court powers in support of arbitral proceedings and in support of emergency arbitrators

These are discussed and summarised below. It is also noteworthy that the Law Commission has decided not to make any recommendation for reform in certain other areas, including appeals on a point of law, confidentiality and discrimination. This Final Report follows a rigorous and extensive consultation process, which we reported on here and here.

Key recommendations

Codification of the duty of disclosure

Since the Supreme Court’s decision in Halliburton v Chubb, arbitrators have been under a common law duty to disclose any circumstances which might reasonably give rise to justifiable doubts as to their impartiality.

In its first Consultation Paper, the Law Commission recommended that this common law duty be codified and included within the Act. The majority of responses agreed with the proposal for codification. However, there were some concerns raised by specialist organisations operating in the commodity, maritime and insurance sectors about the need for, and application of, such a statutory duty of disclosure in these sectors.

The Final Paper maintains the Law Commission’s recommendation for codification. In response to the concerns raised, the Law Commission has sought to reassure consultees that codification should not undermine the flexibility offered by the common law. The proposed legislative provision does not prescribe what needs to be disclosed. The Law Commission has also clarified that failure to make disclosure can give rise to justifiable doubts as to an arbitrator's impartiality and expose them to removal under s24 of the Act, but that beyond that, no further consequences are proposed to be specified.

In terms of the arbitrator's state of knowledge, the Law Commission has recommended that the duty of disclosure should be based on what the arbitrator ought reasonably to know rather than simply their actual knowledge. This broader duty was important to maintain the appearance of impartiality in arbitrators. However, whether the arbitrator is required to make inquiries will depend on the circumstances, such that no formal requirement for arbitrators always to make inquiries has been recommended.

Strengthening arbitrator immunity

The Law Commission has recommended that (1) the law be reformed so that arbitrators incur no liability for resignation unless the resignation is proved to be unreasonable, and (2) arbitrators should incur no liability, including costs liability, in respect of an application for their removal, unless the arbitrator has acted in bad faith. These reforms should ensure that arbitrators can make robust and impartial decisions without fear of subsequent personal liability whilst ensuring that arbitral parties should not have to bear wasted costs where arbitrators either resign unreasonably or act in bad faith.

Power of summary disposal

Summary disposal allows arbitrators to dispose of any issue, claim or defence, including jurisdictional objections, which lack merit. While the Law Commission accepted in its first Consultation Paper that arbitrators likely had an implicit power under the 1996 Act summarily to dispose of claims or issues, it also recognised that there was benefit in providing arbitrators with an express legislative power. This proposal was welcomed by a significant majority of consultees. It is unsurprising, therefore, to see this proposal in the Final Report and the draft Bill. Clause 7 of the draft Bill allows an arbitral tribunal to adopt a summary procedure to decide any issue and to issue an award on a summary basis. The proposed threshold is where the tribunal considers that a party has no real prospect of success. However, the language is carefully crafted to protect party autonomy by giving parties the power to disapply the provision, and also preserves tribunal discretion in determining the procedure for any summary disposal process.

Revised framework for s67 challenges

S67 of the Act provides that a party can apply to the English court to challenge an arbitral award on the basis that the tribunal that issued the award lacked substantive jurisdiction. In the case of Dallah the Supreme Court stated that the court should undertake a full rehearing for any application under s67. This would be the case even if an arbitral tribunal had already undertaken a full hearing on the question of its own jurisdiction.

In its first Consultation Paper, the Law Commission questioned whether the approach in Dallah could lead to duplication of time and cost and be potentially wasteful and unfair. Having reviewed the polarised responses to the first and second Consultation Papers on this question, the Law Commission has finally proposed that a full rehearing under s67 should not be permitted where a party has already challenged the jurisdiction of the tribunal and the tribunal has ruled on this issue. This is a pragmatic approach, designed to prevent parties who have obtained favourable arbitration awards from facing duplication of time and cost from repeated jurisdictional challenges.

The Law Commission proposed in its second paper that the changes to the s67 procedure be effected through rules of court rather than through legislation. This has been carried out through to clause 11 of the draft Bill, which provides clear legislative authority to the court to make rules and guidance on what those rules should contain.

New rule on governing law of the arbitration agreement

The debate as to which law should govern an arbitration agreement in the absence of express choice has been ongoing internationally for many years. At its core, the debate centred on whether, where there was no express governing law clause for the arbitration agreement, it should be governed by the law of the seat of arbitration or by the governing law of the contract. In England, this debate was explored through several cases, starting with the case of Sulamerica, and culminating in the Supreme Court decision of Enka v Chubb.  While it was hoped that Enka would be the end of the debate, the Supreme Court was divided on the question and the final majority judgment was complex.

The Law Commission’s initial proposal was to introduce a new default rule into the Act providing that an arbitration agreement be governed by the law of the seat, unless the parties expressly agree otherwise. This proved controversial. Some consultees argued that parties entering into a contract which contains a governing law clause, particularly those without specialist arbitration advice, will assume that their chosen governing law will apply to all aspects of their contract, including the arbitration clause. Others argued that when parties choose the seat of arbitration, they expect the law of that seat to govern all aspects of the arbitration, including the arbitration clause itself.

The Law Commission has acknowledged both sides of the debate in its Final Paper but has also reiterated the value of simplicity and certainty in this area. Accordingly, it has proposed in the draft Bill that its original recommendation be implemented - that the law of the seat govern the arbitration agreement absent an express agreement to the contrary. The new approach proposed in the draft Bill will only apply to arbitration agreements entered into after the legislation comes into force.

Clarification of powers in support of arbitral proceedings and support of emergency arbitrators

The Law Commission has recommended that s44 of the Act, which sets out the powers that a court can exercise in support of arbitral proceedings, be amended to confirm that orders are available against third parties. Those third parties will also have the usual rights of appeal and will not require the court's consent. These are helpful clarifications given the current uncertainty in the case law.

Although the Law Commission originally proposed to repeal s44(5) (which says that the court shall only act if an arbitral tribunal has no power or is unable to act effectively) on the grounds that it was redundant, the majority of responses were against this proposal on the basis that it has value in limiting court intervention in arbitral proceedings. Accordingly, the Law Commission decided not to recommend any changes to the provision.

The Law Commission has also considered whether changes needed to be made to the Act to allow for emergency arbitration and the enforcement of emergency arbitrator decisions. The Law Commission has given considerable thought to whether a new regime was needed specifically for emergency arbitrators or whether the desired result could be achieved through more minimal amendment and clarification. It has also engaged carefully with the debate surrounding the form and enforceability of emergency arbitrator decisions. In a different approach taken to other jurisdictions such as Singapore, the final recommendations would introduce provisions into the existing framework of the Act empowering emergency arbitrators to issue peremptory orders which result in the court ordering compliance, or alternatively allow emergency arbitrators to give permission for applications to the court under s44(4).

Areas where the Law Commission has not made any recommendation for reform

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 second Consultation Paper then amended this proposal to add that "it should be deemed justified to require an arbitrator to have a nationality different from that of the arbitral parties". Following feedback that discrimination can apply generally to the conduct of the arbitration, the Law Commission also asked whether (1) discrimination should be generally prohibited in the context of arbitration and (2) if so, what the remedies should be.

The Final Report notes that there are several ways in which the law is already concerned with discrimination in arbitration proceedings, and that the only "significant gap" is discrimination by the parties in whom they appoint. However, the Law Commission has concluded that legislating on this issue would: "cause more problems than it solves ...It does no good to introduce a well-meaning law to improve arbitration, by prohibiting discrimination in the appointment of arbitrators by private parties, which has the effect of worsening arbitration, by encouraging satellite litigation or challenges to awards. It diminishes the moral force of anti-discrimination campaigning if discrimination can be used as a cover for disingenuous complaint by arbitral parties seeking to avoid arbitration or an adverse award. This is all the worse if the end result still cannot guarantee more diverse appointments."

The Law Commission clearly reached the conclusion not to make any recommendations on discrimination with reluctance. It commended the existing initiatives of the arbitration community and its suggestion that arbitral institutions could be encouraged to prohibit discrimination in their codes of conduct, to the extent that they do not already do so, is noteworthy.

Appeal on a point of law under s69

Section 69 of the Act is an "opt-out" provision – whilst the Act provides the possibility for parties in limited circumstances to appeal an award on a point of law, parties can (and often do) agree to disapply this provision, thereby prioritising the finality of their arbitration award. Given that responses were overwhelmingly in favour of maintaining the status quo, the Law Commission was not persuaded that it was necessary to reform this provision, which it noted is a "defensible compromise between promoting the finality of arbitral awards (by limiting appeals) and correcting blatant errors of law".

Confidentiality

Although the Law Commission acknowledged that confidentiality is important to many users of arbitration, it noted that if the parties agree that their arbitration is confidential, the law as it stands will already provide them with maximum protection, without the need for statutory intervention. Otherwise, there can be no "one size fits all", as there are a variety of approaches to confidentiality. Overall, the Law Commission's view is that a statutory rule on confidentiality would not be "sufficiently comprehensive, nuanced or future-proof": the current approach "works well" and the development of the law of confidentiality is better left to the common law, alongside the bespoke practices of arbitral rules. The Law Commission noted that the majority of consultees supported this conclusion.

Comment

This review process began in March 2021 when the Ministry of Justice asked the Law Commission to conduct a review of the Act. The Law Commission began its review in January 2022, opening up two rounds of consultations in September 2022 and March 2023. Throughout the process, the Law Commission has engaged with the arbitration community, participating in public events and debates and responding carefully and rigorously within the Consultation Papers to the many written responses from stakeholders.

These final recommendations and the draft Bill itself are the culmination of that process. There can be no suggestion that any changes are being made for change’s sake. The Law Commission has respected the importance of this legislation and sought only to make changes that are necessary. While support was not unanimous for every recommendation, particularly regarding the law governing the arbitration agreement and s67, they are carefully argued and supported, designed to promote certainty, simplicity and efficiency. If enacted into law, they will continue to ensure that the arbitration legislation of England and Wales maintains its market-leading status.

The Lord Bellamy KC of the Ministry of Justice has recognised the importance of arbitration and confirmed that the Government will respond to the report shortly.

For further information, please contact Paula Hodges KC, Partner, Craig Tevendale, Partner, Chris Parker KC, Partner, Andrew Cannon, Partner, Hannah Ambrose, Partner, Charlie Morgan, Partner, Vanessa Naish, Professional Support Consultant, Liz Kantor, Professional Support Lawyer, or your usual Herbert Smith Freehills contact.